Profit Sharing Plans:
A New Comparability Profit Sharing Plan is a plan design created from recent nondiscrimination regulations published by the IRS. The result is flexibility never before seen in the allowable methods of allocating the firm’s profit sharing contribution among the plan participants. This type of plan, therefore, enjoys certain advantages over the traditional Profit Sharing Plan that is worth exploring for small business owners.
What are the advantages of a New Comparability Profit Sharing Plan over a traditional Defined Benefit Pension Plan?
A New Comparability Profit Sharing Plan:
- allows different allocations among different groups of plan participants;
- may allow groups to be determined by salary, service, position, or even a combination of these categories;
- may allow the owner to receive a much larger allocation, as a percentage of pay, than other plan participants;
- may allow the owner to receive an allocation of up to 25% of salary into the plan on an annual basis; and
- may allow an owner to select those participants he would like to reward with larger allocations.
What requirements must be met to quality as a nondiscriminatory New Comparability Plan?
The design is referred to as a “cross-tested” type of profit sharing plan. The discrimination testing is done by reviewing the projected benefits at retirement for a given participant, as opposed to the traditional plan approach of reviewing the contributions allocated to a participant’s account each year. Under this newer type of design, the plan is not required to allocate the same percentage of pay to all participants.
The projected benefits of the highly compensated employees are averaged and compared to the average projected benefits of all other employees. If the “comparison of benefits” falls within a particular range, the plan will pass the mathematical testing stipulated in the regulations to qualify as a nondiscriminatory plan.
The flexibility allowed will be most pronounced if the key employees are, on average, older than most of the other employees; therefore, a customized, company specific feasibility study is required to ultimately determine the allowable opportunities in plan design.
How does the initial allocation of the New Comparability Plan contribution compare to the allocation of a traditional Profit Sharing Plan? Below is a specific example of the allowable plan allocations of a New Comparability Plan versus the traditional Profit Sharing Plan approach1:
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If your goal is a deduction for your business, and a secure retirement benefit for yourself, the flexibility available in the New Comparability approach to allocating profit sharing contributions is worth exploring. We would be happy to provide you with a free look at a Profit Sharing Pension Plan using the New Comparability Method for your specific business.
See also HYBRID PENSION PLANS – Click Here
1Allocations are dependent upon the specific ages of the employees in the firm. The maximum allocation allowed for highly compensated employees in a “top heavy” plan is 25% of salary, and the minimum allowed for other employees is 3% of salary. The allowable allocations necessary to meet the nondiscrimination requirements will vary by employer group.
Disclaimer: The material discussed herein is meant for general illustration or informational purposes only and is not to be construed as financial advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary; therefore, the information contained herein should be relied upon only when coordinated with individual professional advice. We are not licensed for and therefore do not provide tax or legal advice.
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