New Comparability Profit Sharing Plans
Plan sponsors should consider new comparability plans or age-weighted profit-sharing plans that allow significantly larger contributions to higher-paid employees and owners.
David Witz1 min read219 wordsQualified plans should be periodically reviewed to ensure compliance with statutory and regulatory changes and to assess whether the plans are meeting the clients objective. Plan sponsors should consider, among other things, new comparability plans or age-weighted profit-sharing plans.
Plan Design
Profit-sharing plans traditionally allocate the employers contributions to each eligible participants account under a formula that considers the employees compensation for the year. Under final non-discrimination regulations, an employer may maintain a qualified profit-sharing plan in which the participants age is considered when allocating contributions.
New Comparability
The Internal Revenue Code requires that contributions or benefits provided under a plan may not discriminate in favor of highly compensated employees. With regulatory guidance, the IRS revised rules under which defined contribution plans may be tested for compliance on the basis of projected benefits and not on the basis of annual contributions.
New comparability plans are generally used by doctors, accounting offices, law firms, and small closely held businesses that want to provide owners and management a better benefit package than is available under traditional defined contribution arrangements.
Cross-Testing Method
Under the cross-testing method, contributions are converted to equivalent benefits payable at normal retirement age and tested on the basis of these equivalent benefits. New comparability defined contribution plans use this method to build disparities between allocation rates for highly compensated employees and all other employees.
