New Comparability Plans

New Comparability Plans

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New Comparability Plans are a type of qualified retirement plan that allow businesses to fund different profit sharing amounts or rates to targeted groups of employees. These plans are often implemented to allow business owners and other highly compensated employees to receive larger contributions than permitted under traditional retirement plans, while keeping employee funding costs to a minimum.

Features and Benefits
New Comparability plans have the following features:

Discretionary Contributions – New Comparability Plans offer discretionary contributions allowing employers to increase or decrease contributions annually.
Maximum Contributions – They can be designed to allow business owners to receive the maximum contribution permitted in a defined contribution plan.
IRS Approved – New Comparability Plans are approved by the Internal Revenue Service.
401(k) Option – They can be structured as a stand-alone profit sharing plan or can include a 401(k) feature (either Traditional or Safe Harbor) allowing for employee salary deferrals.

Comparison of Plans
Below is an example that illustrates the benefits of New Comparability Plans. This example shows a company with two owners and five other employees for a total of seven that are eligible to participate. The owners wanted to maximize their contributions to the plan.

NEW COMPARABILITY EXAMPLE
DEMOGRAPHICS			ALLOCATION METHODS
Employee	Age	Salary	Salary Proportional	FICA Integrated	Age-Weighted	New Comparability
Owner 1	53	$245,000	$44,096	$47,787	$49,000	$49,000
Owner 2	47	$150,000	$26,998	$27,468	$40,438	$49,000
Employee 1	40	$52,000	$9,359	$8,314	$7,919	$2,600
Employee 2	35	$48,000	$8,639	$7,674	$4,862	$2,400
Employee 3	30	$40,000	$7,199	$6,395	$2,694	$2,000
Employee 4	28	$35,000	$6,299	$5,596	$2,003	$1,750
Employee 5	25	$32,000	$5,760	$5,116	$1,434	$1,600
Totals		$602,000	$108,350	$108,350	$108,350	$108,350

Who Should Implement?
Technically, any business wishing to establish a qualified retirement plan could implement a New Comparability Plan; however, these plans work best for companies wishing to maximize benefits for owners and Highly Compensated Employees. Many professional practices, including physicians, attorneys, and engineers, adopt New Comparability plans for this reason.

Listed below are important considerations for companies wishing to implement New Comparability Plans:

Ages of Employees – Because of Nondiscrimination Testing requirements mentioned below, the ages of employees are an important factor to consider. New Comparability Plans generally work best in companies where owners and Highly Compensated Employees are older, on average, than other employees.
Employee Turnover – Companies with high employee turnover may experience problems in passing Nondiscrimination Testing which can lead to unexpected or fluctuating contribution requirements.
Numbers of Employees – Companies with smaller numbers of employees may face more risks with Nondiscrimination Testing which can lead to unexpected or fluctuating contribution requirements.

How Contributions are Funded
New Comparability plans allow the employer to fund different contributions to targeted groups of employees as specified in the plan document. Employers make separate contributions to each group, and contributions are allocated to employees within their respective groups in proportion to salaries. Contributions are generally discretionary each year, with the exception of contributions required because of the Compliance Testing, including a 5% minimum contribution (see more below).

Defining Contribution Groups
Employers have flexibility in defining contribution groups as long as the groups are clearly defined and not subjective from year-to-year. Below are some examples of permitted contribution groups.

Examples of New Comparability Groups
Example 1: Owners	Example 2: Job Title	Example 3: Location
Owners Other HCEs NHCEs	Physicians Nurses Office Managers Administrative Staff	Dallas Location Denver Location New York Location Seattle Location

Impact of Compliance Testing
If not for non-discrimination requirements imposed by the Internal Revenue Service, employers could choose, without limitation, how much to contribute to each group. Current law does not allow plans to discriminate in favor of Highly Compensated Employees (generally owners and highly paid employees). The Internal Revenue Code deems traditional plans non-discriminatory, but requires New Comparability Plans to prove they do not discriminate by passing the General Nondiscrimination Test.

Age-Based Testing
The General Nondiscrimination Test uses a concept called Cross Testing which converts today’s contributions amounts into projected values at retirement for each participant. Because of the time element involved in this projection, a younger participant will have a larger projected contribution than an older participant receiving the same contribution. This concept allows plans to make larger contributions for some participants and still pass the test.

Minimum Contributions
The General Nondiscrimination Test includes the requirement that the employer fund a minimum contribution to Non-Highly Compensated Employees equal to the lesser of (1) 5% of Compensation, or (2) one third of the highest contribution rate of any Highly Compensated Employee.

Impact of Family Members

One item that can cause unexpected problems with testing and can prevent the plan from maximizing contributions for highly compensated employees is when family members of owners and highly compensated employees work for the company. This can be especially problematic when these family members are younger, including older teenagers and young adults. These problems occur because certain family members of owners are deemed to be Highly Compensated Employees for purposes of testing, even though they may be working part-time or drawing a low salary. Having young highly compensated employees can cause issues with the age-based testing.