New Comparability (Cross-Tested)

A new Comparability Plan is a type of “Cross-Tested” Plan. The employer contribution is allocated by a formula set out in the plan document. Under a typical new comparability design, plan participants are divided into two or more groups with each group receiving its own level of employer contributions. Examples of groups that may be established are based on job category, age, or age and service.

This type of plan design may permit a profit sharing plan to make very substantial contributions for an, on average, older group, yet provide a much lower contribution for the younger and presumably lower paid employees. If the demographics are workable, this will result in a considerably larger contribution to the ownership group than that which could be obtained using permitted disparity or a non-cross tested design.

Yes, this type of plan is tested for non-discrimination on a cross-tested basis under Section 401(a)(4) of the Internal Revenue Code. Under the IRS Regulations the differing levels of profit-sharing contributions made to the pre-determined groups may pass non-discrimination testing if they are non-discriminatory on a benefits basis. To do this, the contribution allocation is converted into a projected benefit as if the contribution was the amount needed to fund a defined benefit plan’s retirement benefit. If the projected benefit passes this “cross-testing” non-discrimination test, it is acceptable.

Yes, new comparability works very well for 401(k) plans in which the employees are not deferring enough to allow the highly compensated employees to defer their desired amount. In these situations, the highly compensated employees are able to achieve the desired level of contribution through a new comparability profit sharing contribution, with no deferrals necessary. Since the highly compensated employees are not making salary deferrals, they are not limited based on the deferral percentages of the non-highly compensated employees. Highly compensated employees are not dependent on employee deferrals, and a matching contribution is not needed to encourage higher levels of employee deferrals.