Jamie Ann Hayes, QPFC, C(k)P, AIF(r)

Jamie Ann Hayes, QPFC, C(k)P, AIF(r), Partner and Consultant of FiduciaryFirst, specializes in Employer Retirement Plan Fiduciary Services and Corporate Pension Consulting.

New Comparability 401(k) Plans

A new comparability plan is a type of profit-sharing plan that can either be a standalone plan or the profit-sharing contribution component of a 401(k) plan. For retirement plan sponsors who want to allocate larger contributions to older plan participants, a new comparability plan can be highly effective.

The design of a new comparability plan allows participants to be grouped into different classifications, and then the participants receive a profit-sharing contribution based on that classification. Groups can be established based on things like job category, age, or age and service.

New comparability plans are required to provide a minimum contribution to all non-highly compensated employees (HCE’s). This “gateway minimum contribution” must equal the lesser of one-third of the highest contribution rate given to any HCE or 5 percent of the non-HCE’s compensation.

To test for non-discrimination contribution allocations are converted to a projected benefit at retirement age (typically, age 65). Called “cross-testing,” this means a small contribution to a younger employee can be considered equivalent to a much larger contribution to an older employee. So a 5 percent contribution to a 25-five-year old employee with 40 years to retirement is just as valuable to that employee as a 15 percent contribution is to a 55-year-old with 10 years until retirement.

That makes it possible for older business owners and other highly compensated employees (HCEs) to have much higher contribution rates (the limit for 2017 is $60,000). New comparability plans tend to work best for companies that have consistently strong profits and fewer than 50 employees. If you’re a small business retirement plan sponsor, a new comparability plan could help you maximize your contributions while potentially reducing your plan expenses, but the plan needs to be structured carefully to pass the non-discrimination testing. FiduciaryFirst can help you design your new comparability plan to address your company’s financial goals while helping your employees plan for a confident retirement. For more information, call us at 866-625-4611 or visit www.fiduciaryfirst.com.

Tracking Number:1-616694

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Retirement Plan Consulting Program and other advisory services offered through LPL Financial, a registered investment advisor.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

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