The age-weighted method allocates contributions based on both the age and compensation of eligible employees. It is similar to a defined benefit pension plan, only with discretionary contributions. Since the participants age, or length of time until retirement, is factored into the allocation formula, older participants receive a larger proportionate share of the contribution. This can be advantageous in a situation where the key employees are significantly older than the other employees.

 

In certain situations, an age-weighted plan design works extremely well, but a possible drawback could be employees with the same salaries receiving different allocations, based on age. Also, an older non-principal employee may receive a larger share than a younger principal.