Business owners looking to reward key employees and stay on track with their own retirement savings may consider using a new comparability plan. A new comparability plan is a qualified defined contribution (DC) plan that allows employers to designate employees into groups and customize contributions across these groups. The plan allows employers to maximize plan contributions to owners, highly compensated employees (HCEs) and those who may be older and closer to their retirement years. Though HCEs receive a larger share of annual employer contributions, new comparability plans are still considered nondiscriminatory under the law and undergo annual nondiscrimination testing to ensure a healthy contribution to non-highly compensated employees as well.
Key advantages for employers and small businesses
New comparability plans benefit employers in several ways:
- Maximize contributions: Business owners or other HCEs may receive amounts up to the annual IRS DC retirement plan limits
- Reward longevity: As this plan looks at the benefit of contributions at retirement, more is contributed to older employees who have less time to grow their assets
- Flexibility: Employers can change (increase, decrease or discontinue) contributions on an annual basis
- Tax deductibility: Generally, employer contributions are tax deductible
A traditional 401(k) plan with profit sharing that treats all employees equally may present a challenge to small business owners aiming to stay on track for retirement. Thus, for small businesses or startups that may have a relatively high number of HCEs compared to traditional, larger companies, new comparability plans may be a good fit. Meanwhile, new comparability plans may not be a fit for companies with large fluctuations in the size of their workforce and demographics, as size changes could impact funding costs and the ability to achieve funding objectives.
Boulay can help
New comparability plans may make sense for your business if you want to maximize contributions to highly compensated owners and key employees while still giving meaningful allocation to non-highly compensated employees. To understand your options for a plan structure that meets the needs of your business, owners and employees, contact a Boulay advisor today at 952.893.9320 or learnmore@boulaygroup.com.
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Boulay PLLP and Boulay Financial Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc. Prime Global is not affiliated with Valmark Securities, Inc. and Valmark Advisers, Inc.