Pre-approved methods of allocating employer contributions include:
- a level percentage of pay for each employee, and
- an “integrated” plan that takes the employer’s FICA taxes into account by allocating an additional contribution for pay above the Social Security wage base.
Many other designs are possible when pre-approved plans aren’t good enough. Two examples are shown here:
- A service-weighted plan that contributes a higher percentage of pay for each year an employee stays with the company. Service-Weighted plan allocates 1% of pay per year of service.
- A “class allocation” plan that enables highly paid employees to defer more of their compensation while other employees take most of their compensation in cash. Class Allocation plan allocates 20% of pay for owner, 5% for employees.
Both of these examples are “cross-tested” plans, named after the IRS “cross-testing” process of converting contributions into benefits for nondiscrimination testing.
You can follow current defined contribution topics on the DC plan section of our retirement plan blog.