What is New Comparability?
New comparability is a profit sharing allocation formula that allows a business owner to permissibly skew benefits to a select group or tier of employees. This allocation formula is also referred to as cross-tested.
How is New Comparability used?
Typically, new comparability is paired with 401(k) and safe harbor non‐elective features. This helps to maximize the plan design by skewing the most benefits to the selected group. The Plan Sponsor determines the groups to target within the plan, subject to certain restrictions associated with the additional testing that must be performed. In smaller plans you will often see only two groups: owners; and all other employees.
Is there additional testing needed?
Yes there is. The allocation formula itself (or the fact that such allocation generally heavily favors highly‐compensated and/or key employees) requires careful consideration of the Top Heavy, Minimum Gateway, Average Benefits and General Tests. However, most of these tests can be satisfied by employing certain plan design features.
What are the limits to this plan?
New comparability is simply a way to allocate a profit sharing contribution within a profit sharing plan. Therefore, other than the uniqueness of the new comparability allocation formula, a “new comparability” plan remains a profit sharing plan subject to all of the other rules associated with a profit sharing plan.
What if a company wants to contribute more than what can go into a 401(k) profit sharing plan?
If a client would like to contribute more than the annual defined contribution limit to their retirement plan, we are capable of exploring the appropriateness of pairing a new comparability plan design with a cash balance plan. A cash balance plan is a type of defined benefit plan that also can skew benefits to a selected group of employees. These “paired plans” can be very powerful if designed correctly.
The illustration shown above is based on hypothetical data and is for illustrative purposes only. Legacy Retirement Solutions, LLC does not provide tax, legal or investment advice. Therefore, this illustration is not to be construed as tax, legal or investment advice. Please consult with your own individual accountant, attorney and/or financial planner for such guidance as retirement plan sponsorship is generally a single component of an overall tax and investment strategy. Further, this illustration assumes that the employer does not sponsor any other qualified plans. If the client elects to use Legacy Retirement Solutions, LLC as the provider for this allocation service, the employer will be instructed to supply actual employee census data to be used in the preparation of a final allocation report at the completion of the plan year. The same methodology illustrated above will be applied to the final allocation report. However, results may differ from this illustration to the final allocation report.