A qualified plan with a new comparability allocation formula allows employers to allocate a greater contribution percentage to certain preferred employees. This can result in a significantly greater contribution to the owners and other preferred employees, while lowering the plan's overall costs.
A plan with a new comparability allocation formula is able to do this by dividing the workforce into circumscribed groups of employees. The contribution percentage is different among the different groups, but for employees within a group, the percentage is the same. Examples of groups are: hourly employees, salaried employees, owners, physicians, etc. The percentages are determined such that the plan is non-discriminatory in light of regulations issued by the Internal Revenue Service.
A new comparability plan will only work if the favored employees are significantly older than a certain percentage of the other employees. Nondiscrimination is tested by comparing benefits the employees will receive at retirement age, e.g., age 65. The testing is a complex process and is not discussed here,
To illustrate, the following example compares the allocation of a traditional profit sharing plan to that of a new comparability plan. There are two groups: group 1 consists of the owner of the company, and group 2 of all other employees.
Example: The owner of a small company uses recent employee census information to analyze different plan options. What follows is a comparison of the owner's current 25% traditional profit sharing plan vs. a new comparability plan:
|Employee||Age||Annual Earnings||Traditional Profit Sharing Plan||New Comparability Profit Sharing Plan|
In the above example, the contribution to the owner went up by $27,000, an increase of 108%; and the total cost to fund the plan went down from $70,500 to $61,100, a savings of over $9,400.
Employer costs can be even further reduced if the new comparability plan is combined with a 401(k) plan.
Upon request we can complete a review of plan options for your business, including a detailed analysis of a new comparability plan as it would apply to your business. Click here to get started.