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New Comparability Plan

New Comparability Plans may enable employers to reduce retirement plan costs while maximizing contributions

Suitable for businesses that wish to enable key employees to save more for retirement, particularly those who have difficulty meeting non-discrimination requirements of standard Profit-Sharing or 401(k) plans.

  • New Comparability plans permit companies to categorize employees by several criteria, including ownership, tenure, and job function. Each category may then receive a different contribution percentage.
  • In Age-Weighted plans, contributions for older workers may be considerably higher than those for younger employees.

If an employer hasn't had their retirement plan reviewed or updated recently, it may not be taking advantage of age-weighted allocations and new comparability formulas that benefit plan participants as they approach retirement age. These plans, also known as cross-tested plans, are designed to take advantage of cross-testing — where contributions are tested on the basis of benefits at retirement age rather than on the basis of amounts contributed.

As detailed in the example below, in a plan with an owner with younger employees, the contribution amounts that result from applying cross-testing may be more beneficial to older employees than profit-sharing plans that use a pro rata formula or even an integrated profit-sharing formula.

Here's a hypothetical example of how a New Comparability plan works, assuming an owner in his or her 50s with younger employees in their 20s or 30s:1

Profit Sharing Plan vs New Comparability Plan Using Pro Rata Formula
Name Age Compensation Contribution Profit-Sharing % of Profit-Sharing Contribution New Comp % of New Comp
Dr. James 55 $255,000 $51,000 66.23% $51,000 88.69%
Employee #1 60 $45,000 $9,000 11.69% $2,250 3.91%
Employee #2 35 $35,000 $7,000 9.10% $1,750 3.04%
Employee #3 25 $25,000 $5,000 6.49% $1,250 2.18%
Employee #4 25 $25,000 $5,000 6.49% $1,250 2.18%

1Example assumes owner is contributing the maximum profit-sharing contribution allowed.

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