Text Box: Both plans are permitted under the tax laws and the new IRS regulations. However, the new comparability plan gives Tom a much larger share of XYZ, Inc.’s annual plan contribution. Instead of 71% of the traditional plan contribution, Tom will have 94% of the new comparability plan’s contribution allocated to his own account. Tom will receive $7,500 more, and the cost of providing benefits for his employees will be $7,500 less.¨ Text Box: A LESSON IN QUALIFIED RETIRMENT PLANS The information contained in these page focuses on pension benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA), particularly those plans considered qualified for special tax considerations under the Internal Revenue Code. These plans are commonly referred to as “qualified plans.” New Comparability Plans A new comparability plan is an entirely new type of profit sharing plan that allows very substantial contributions for a favored and, on average, older group of employees, with much lower contributions for other employees. In some cases, annual contributions can be as high as 25% of pay or $30,000 per participant for an older, highly compensated group of employees, with as little as 3% of pay allocated to the accounts of younger, non-highly compensated employees. How is that possible? IRS regulations now allow employers to divide plan participants into two or more “classes”, and to make much larger contributions to a plan for one class than for the another. In addition, the regulations provide a method for testing based on an analysis of the projected benefits at retirement to show that the benefits provided to highly compensated and non-highly compensated employees are “comparable”. If benefits are shown comparable, the plan is considered non-discriminatory and is permitted under the law and the regulations. What is the bottom line for many employers with this new plan? The percentage of the plan contribution going to the accounts of owners and other highly compensated employees can be much higher with a new comparability plan than with a traditional profit sharing plan. Here is a simple example: XYZ, Inc.’s owner and president, Tom, age 55, earns $150,000 per year. He is the company’s only highly compensated employee. XYZ, Inc. has two non-highly compensated employees, Ann, age 55, earns $27,000 per year; and Jim, age 28, earns $35,000. Tom would like to have a profit sharing plan with the maximum possible contribution allocated to his individual account; with the minimum possible contribution allocated the accounts of the other employees. Look at the difference in contribution allocations between the maximum “15% of pay” traditional profit sharing plan and the New Comparability Plan for XYZ, Inc.:
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New Comparability Plan

 

Contribution

% of Pay

Tom

$30,000

20%

Ann

$825

3%

Jim

$1,050

3%

Total

$31,875

 

Traditional Profit Sharing Plan

 

Contribution

% of Pay

Tom

$22,500

15%

Ann

$4,125

15%

Jim

$5,250

15%

Total

$31,875