New Comparability Plan
These plans, sometimes referred to as "cross-tested plans", are profit sharing plans that are tested for nondiscrimination as though they were providing benefits from a defined benefit plan.
New comparability plans are generally utilized by small businesses that want to maximize contributions to owners and higher paid employees while minimizing those for other employees. Employees are separated into two or more allocation groups, such as owners and non-owners.
This grouping method allows the employer to divide the employees into specific groups with each group receiving a different contribution rate. For example, we can setup a plan where the contribution rate is 20% for the owner who is making $290,000 (result- a maximum contribution of $58,000); and the contribution rate for the non-owners is 10%. The allocation formula will be allowed as long as the plan satisfies the non-discrimination requirements. In situations where the non-owners are very young and the owners are relatively old, the 10% may be as low as 5%.
Allocation groups may be defined by job classification, ownership amounts, divisions or another objective business criteria.
Cross testing is the process of converting contributions made today into their equivalent benefit that will ultimately be provided at retirement.
Nondiscrimination testing for new comparability plans is very sensitive to demographic changes In a small business, the plan may fail the test when a young non-highly compensated employee is replaced by a much older employee. To pass the test, the allocation rate for the non-owner group may have to be increased or the owner's allocation rate may have to be reduced.
Nondiscrimination testing under new comparability requires a more complex set of calculations and normally requires the expert services of a professional administrator. New comparability plans should be considered for companies where the employees targeted to receive larger contribution allocations are more highly compensated and older than other employees.