The following is an example of the way contributions could be allocated under a Target Benefit Plan.
In the example, the following factors were used:
The Target Benefit is 80% of salary, payable for life beginning at age 65. It must be reduced 1/25th for each year of future participation less than 25 years to meet Safe Harbor requirements.
The Amount @ age 65 is a theoretical amount needed to provide the Target Benefit. In the example, it is assumed you need $8.50 to provide each dollar of Target Benefit.
The Contribution is an amount, payable at the end of each year until age 65, which, at 7.5% interest, will grow to the amount needed at age 65.
Target Amount Contri- % of Age Salary Benefit @ age 65 bution Salary Owner 55 150000 48000 408000 28840 19.23% Manager 45 75000 48000 408000 9422 12.56% Employee 1 40 30000 24000 204000 3001 10.00% Employee 2 30 25000 20000 170000 1102 4.41% Employee 3 25 25000 20000 170000 748 2.99%
As can be seen, the Owner's contribution is a larger percentage of salary than the other employees.
To receive the same contribution under a non-integrated Money Purchase Plan, the total contribution would have to be more than $15,000 greater, all of which would go to the other employees.
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