New Comparability Plans: A Flexible Retirement Plan Option for Business Owners
Are you a business owner weighing options for types of retirement plans? A new comparability plan is a flexible option with benefits for yourself and other key employees.
IN THIS ARTICLE:
- New comparability plans allow employers to allocate retirement contributions based on employee groups—such as owners, highly compensated employees (HCEs), and others—while remaining nondiscriminatory.
- These plans are discretionary and flexible, making them ideal for businesses with owners or HCEs who are older or nearing retirement who want to maximize savings quickly.
- Employers can choose to offer these plans as profit-sharing only or include a 401(k) feature, enabling both employer and employee contributions.
What is a new comparability plan?
New comparability plans—also known as cross-tested profit sharing plans—are a type of qualified defined contribution retirement plan that allows businesses to allocate employer contributions based on employee groups set by the employer. This allows employers to reward particular groups, like owners or executives, with higher employer contributions, while still offering retirement benefits to other employee groups.
The primary benefit of a new comparability plan is that HCEs receive a higher share of annual employer contributions, while remaining nondiscriminatory under the law.
How does a new comparability plan work?
New comparability plans allow employers to make a separate contribution for different groups of employees. For example, groups can be created for owners, HCEs, and non-HCEs.
Groups can also be created based on business goals, like job classification or title. Different contribution amounts can be given to each group.
What type(s) of businesses can have these plans?
Businesses of any size can offer this type of retirement plan. New comparability plans are ideal for owners and other HCEs who have a shorter runway to retirement and therefore are trying to save quickly.
And because the IRS requires new comparability plans to pass an annual discrimination test, these plans work best for employers whose owners and HCEs are older, on average, than the company’s other employees.
Are employer contributions required?
No. Contributions are discretionary, so you can adjust or even eliminate contributions altogether in future years based on business profitability. This makes them a flexible option for employers.
Can employees make contributions to new comparability plans?
Yes. These plans may be stand-alone profit sharing plans (employer-only contributions) or include a 401(k) for employee contributions.
Choose the best retirement plan for your business with Landmark Financial
When you work with Landmark Financial, we’ll help you build out the right benefits package for your business and employees.