New Comparability Plan
What is a New Comparability Plan?
A New Comparability Plan is a Profit Sharing Plan in which the employees are divided into classes, with each class receiving a contribution with a different percentage of compensation. For example, the owners may be in one class and all the other employees in another class. Some plans may have more classes depending on their employee demographics and goals. This arrangement can help you maximize deductible contributions to select owners and key employees.
How much contributions are allowed for the business owner?
They can be designed to allow business owners to receive the maximum contribution permitted in a defined contribution plan with catch-up contributions.
Can New Comparability be used with a 401(k) plan?
It can be structured as a stand-alone profit sharing plan or can include a 401(k) structure allowing for employee salary deferrals. It can be used with both new and existing 401(k)/ Profit Sharing Plans.
Is there a Non-Discrimination Test to be passed?
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 are complex and difficult to explain.
Are contributions to New Comparability Plans discretionary?
Because it is a Profit Sharing plan, contributions can be increased or decreased annually.
Comparison of Profit Sharing Formulas
Legend: P – Principal, O- Owner, H – Highly Compensated Employees, C – Class
This chart shows how New Comparability can favor the Principals – receiving an allocation of 93.7% of the total contribution and only 6.3% goes to the Non-Principals.