New Comparability Profit Sharing

WHAT IS A NEW COMPARABILITY PLAN?

A new Comparability Plan is a type of “Cross-Tested” Plan. The employer contribution is allocated by a formula set out in the plan document. Under a typical new comparability design, plan participants are divided into two or more groups with each group receiving its own level of employer contributions. Examples of groups that may be established are based on job category, age, or age and service. 

This type of plan design may permit a profit sharing plan to make very substantial contributions for an, on average, older group, yet provide a much lower contribution for the younger and presumably lower paid employees. If the demographics are workable, this will result in a considerably larger contribution to the ownership group than that which could be obtained using permitted disparity or a non-cross tested design.


IS THERE ANY DISCRIMINATION TEST TO BE PASSED?

Yes, this type of plan is tested for nondiscrimination on a cross-tested basis under Section 401(a)(4) of the Internal Revenue Code. Under the IRS Regulations the differing levels of profit-sharing contributions made to the pre-determined groups may pass nondiscrimination testing if they are nondiscriminatory on a benefits basis. To do this, the contribution allocation is converted into a projected benefit as if the contribution was the amount needed to fund a defined benefit plan’s retirement benefit. If the projected benefit passes this “cross-testing” nondiscrimination test, it is acceptable.


CAN NEW COMPARABILITY BE USED WITH A 401(k) PLAN?

Yes, new comparability works very well for 401(k) plans in which the employees are not deferring enough to allow the highly compensated employees to defer their desired amount. In these situations, the highly compensated employees are able to achieve the desired level of contribution through a new comparability profit sharing contribution, with no deferrals necessary. Since the highly compensated employees are not making salary deferrals, they are not limited based on the deferral percentages of the nonhighly compensated employees. Highly compensated employees are not dependent on employee deferrals, and a matching contribution is not needed to encourage higher levels of employee deferrals.

 

ARE THERE ANY OTHER LIMITS OR TESTS?

Yes, New Comparability plans are subject to all the other limits and discrimination tests applicable to all profit sharing plans and 401(k) plans. 

In addition, new regulations were recently passed that require additional tests to be met.  The plan can test on a New Comparability basis if it provides broadly available allocation rates, age-based allocations, or passes a gateway providing a 5% allocation for all eligible nonhighly compensated employees, or a lesser amount as long as the highest allocation any highly compensated employee receives is no more than three times what the lowest nonhighly compensated employee’s allocation is.

For a detailed listing of annual limits on deferrals, catch up contributions and employer contributions, please refer to QPA's annual limitation listing.

Example: Assume the Board of Directors decides to make an annual contribution that would provide the maximum benefit for owners/shareholders under the current tax code provisions.  Below is a comparison of the different types of plans available, and the various amounts required to provide the desired benefit.

New Comparability Profit Sharing 2015

The plan satisfies the nondiscrimination regulations because the equivalent benefit percentages (i.e., the real value of the contributions on a future value basis) for all employees are the same. This plan design may not be acceptable to all employers.

Please contact a QPA representative if you would like to explore these opportunities further, or if you have any questions concerning the application of the new rules to your defined contribution plan.

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