New Comparability Plan: A New Paradigm in Retirement Planning for Small-Business Owners

Fevurly, Keith R.
April 2007
Journal of Financial Planning;Apr2007, Vol. 20 Issue 4, p68
Academic Journal
A profitable, closely held small-business owner not only may want to implement a qualified retirement plan for the business, but also contribute additional money on a pre-tax basis beyond the current annual elective deferral limits. And the owner may simultaneously want to minimize contributions to lower-paid employees. One answer is the new comparability plan. This plan is a form of cross-tested defined-contribution retirement plan that typically takes the form of a discretionary profit-sharing plan. The Treasury Department issued final regulations in 2001, but the plan is still not widely understood and is often confused with its close cousin, the age-weighted profit-sharing plan. The common design factor underlying the plan is an allocation or contribution formula that rewards highly compensated employees more favorably than lower-compensated employees, regardless of age or years of service. This type of plan will successfully pass the nondiscrimination rules applicable to all tax-qualified plans as long as it satisfies one of two minimum "gateway" requirements, or provides a "broadly available" allocation rate to all employees or a "gradual age or service schedule" option. The plan works especially well where the owners of a small business are of different ages, but earn approximately the same amount of compensation, thus precluding an age-based plan. The new comparability plan is more flexible and can allocate more to the owner/employee than an age-weighted plan. The plan also works well as a supplement to an existing 401 (k) plan already established for the benefit of the small-business owner(s) and the owner's employees, something the age-weighted plan can't do.


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