New Comparability Profit Sharing Plans

Owner Only 401(k) Plans
July 7, 2017
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New Comparability Profit Sharing Plans

What Is A New Comparability Profit Sharing Plan?


These plans allow for the largest share of the company’s contribution to be allocated to the owner and or key employees.
There is flexibility in the contribution level since it is a profit sharing plan and the contribution each year is discretionary.
This type of plan, therefore, enjoys certain advantages over the traditional profit sharing plan and is worth exploring if you are the owner of a small business.

What are the Advantages Over a Traditional Profit Sharing Plan?


A New Comparability profit sharing plan:

• allows different allocations among different groups of plan participants;
• may allow groups to be determined by salary, service, position, or even a combination of these categories;
• may allow the owner to receive a much larger allocation, as a percentage of pay, than other plan participants; and
• may allow an owner to select those participants he would like to reward with larger allocations.

What Requirements Must Be Met To Qualify As A Nondiscriminatory New Comparability Plan?


This design is referred to as a “cross-tested” type of profit sharing plan. The discrimination testing is done by reviewing the projected benefits at retirement as opposed to the traditional plan approach of reviewing the contributions allocated to a participant’s account each year. In this new type of design, the plan is not required to allocate the same percentage of pay to all participants.
The projected benefits of the highly compensated employees are averaged and compared to the average projected benefits of all other employees. If the comparison of benefits fall within a particular range, the plan will pass the mathematical testing stipulated in the regulations to qualify as a nondiscriminatory plan.
The flexibility allowed will be most pronounced if the key employees are, on average, older than most of the other employees. Only a feasibility study created for a specific firm will ultimately determine the allowable opportunities in plan design for that firm.

How Does The Initial Allocation Of The New Comparability Plan Contribution Compare To The Allocation Of A Traditional Profit Sharing Plan?


Below is a specific example of the allowable plan allocations of a New Comparability plan versus the traditional profit sharing approach.
If your goal is a deduction for your business and a retirement benefit for yourself, the flexibility available in the New Comparability approach to allocating profit sharing contributions is worth exploring. American National would be happy to provide you with a free look at a New Comparability plan for your specific business.

 

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