Profit Sharing With Classes
New Comparability is a type of Profit Sharing plan that maximizes the amount contributed to a target group of participants, typically owner(s), officers or key executives.
At the same time, this design minimizes the total cost of the company’s contributions on behalf of its other employees. A New Comparability Profit Sharing plan permits disparity of contributions, allowing different allocations among separate groups of plan participants. Contributions can be allocated to employees based on several different methods (or by a combination of these):
based on owner status
based on officer, executive, or higher compensation status
This special type of Profit Sharing plan design offers a great deal of flexibility in the total contribution amount (for years that one is made), of up to 25% of eligible pay for owners and officers or key executives and lower percentages for other named classes of employees. Also, the employer may skip the contribution entirely in any years when a Profit Sharing arrangement is not intended.
With a New Comparability Profit Sharing plan, employees are divided into groups, each receiving a contribution that is a different percentage of their compensation. One common arrangement is to include owners and officers in group “A,” management in group “B,” and clerical/staff in group “C.”
This retirement plan can be custom-designed, initially, allowing:
1
groups to be determined by title, salary, service, or position (or even a combination of these categories)
2
the owners and officers or key executives to receive a larger allocation (as a percentage of pay) than other Plan participants
3
the owner and officers or key executives to receive a maximum allocation of up to the maximum benefit limit allowed under Section 415 of the Internal Revenue Code.
Typically, the Board of Trustees (or a business owner, plan Administrator, or other individual acting on behalf of a Board of Trustees) will make the determination as to the specific division of employee classifications. The Administrator can assist with general rules governing the process of assigning classifications.
* New Comparability Can Be Used With A 401k Plan
A New Comparability Profit Sharing plan pairs well with a 401k and is included without cost in USA 401k! For an existing 401k plan, this element can be added as a plan enhancement by amendment. New Comparability Profit Sharing works especially well for 401k plans where owners and officers or key executives are currently limited under ADP (average deferral percentage) testing. When owners and officers or key executives are not reaching their desired savings level under the 401k by itself, this is perhaps a signal to consider an alternate design. The addition of a New Comparability Profit Sharing plan often permits these highly compensated employees to achieve their desired level of overall retirement capital accumulation.