New Comparability Plan
Rev. 09/23/04, E-mail Alert 2004-19

Just what is the New Comparability Plan, and how does it work?

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. 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.

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.

This is because IRS new comparability regulations allow much larger contributions to the plan for one class than for another – provided that the nondiscrimination cross-testing can be passed and provided a minimum gateway contribution is made in the amount of either:

• 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.
  

Once the gateway contribution is satisfied, the overall contribution is tested on a benefits basis.

Our selection of available documents includes: individually-designed profit-sharing and 401(k) new comparability plan documents, and pre-approved volume submitter profit-sharing, money purchase and 401(k) plan documents that will support new comparability plan designs.

For another article on Cross-tested plans, click here.