NEW COMPARABILITY OR AGE-WEIGHTED PROFIT SHARING

WHAT IS A NEW COMPARABILITY PLAN?

A New Comparability Plan is a profit sharing plan in which the employees are divided into groups, with each group receiving a contribution that is a different percentage of compensation. The simplest type of grouping is to have the owners in one group and all other employees in another group. Some employers have several groups such as owners over age 40, owners under age 40, managers, clerical staff, professional staff, etc.

Yes, this type of plan is tested for nondiscrimination on a cross-tested basis under Section 401(a)(4) of the Internal Revenue Code. The calculations involved are complex and difficult to explain in easy terms. In general, the contribution on behalf of each person is accumulated to the retirement age with interest and converted to an annual pension. The pension is expressed as a percentage of the current compensation, and is called an "accrual rate". The accrual rate for an older employee will be lower than for a younger employee since there are fewer years for the contribution to accumulate interest. Therefore, to get the same accrual rate, the contribution on behalf of an older employee can be higher than for a younger employee. The discrimination test is passed if the employees in the favored groups are older than the employees in the less favored groups with lower contribution percentages.

Yes, it works especially well for 401(k) plans in which the employees are not deferring enough to allow the highly compensated employees to defer at the level they desire. In these situations, the highly compensated 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 by the level of deferrals from the nonhighly compensated employees. Since the highly compensated are not dependent on employee deferrals, a matching contribution is not needed to encourage higher levels of employee deferrals.

Yes, New Comparability plans are subject to all the other limits and discrimination tests applicable to all profit sharing plans and 401(k) plans. See our separate brochures for more information on these 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 requiring allocation rates for nonhighly compensated employees to be at least 5% of pay or at least one-third of the highest allocation rate for highly compensated employees.

An Age-Weighted Plan is a profit sharing plan in which the employer contribution is allocated to provide an assumed retirement benefit at normal retirement age.  The Age-Weighted allocation, when accumulated to normal retirement age (i.e. 65), would purchase an equivalent retirement benefit as a percent of compensation.

This type of plan is also tested for nondiscrimination pursuant to Section 401(a)(4) of the Internal Revenue Code.  The calculations involved are complex and difficult to explain in easy terms.

COMPARISON OF PROFIT SHARING ALLOCATION FORMULAS