Maximizing 401k Contributions – New Comparability
New Comparability Plans
Is there a large age gap between the owners and employees in your company? As an owner, do you want to make additional profit sharing contributions to your account?
If so, you may want to consider looking at amending your current 401(k) plan to add a feature that allows for the skewing of profit sharing benefits to the older employees. This feature is often referred to as cross-testing, new comparability, or age-weighted testing.
Generally, the rationale behind this is that older employees have less time until retirement so they should get a bigger share of any profit sharing contributions to build their retirement nest egg. The IRS allows a method to calculate the current contribution amount per participant based on projections of expected benefits at retirement age based on current salary. There are certain guidelines that have to be met, but many companies find that this feature greatly benefits those who are close to retirement.
New Comparability - The Benefits:
This provision provides a skewing of profit sharing benefits towards older & highly compensated employees, while younger employees receive lower benefits due to a much longer timeframe until retirement.
There is a small additional cost to adding a new comparability provision because additional testing methods must be used. These additional methods have their own discrimination tests to calculate the benefits for the owners and employees. Also, it does require some fine tuning and the ability to have your third-party administrator work closely with you.
As opposed to defined benefit plans, which require mandatory contributions and high costs, this allocation can be discretionary, and decided on a year-by-year basis, assuming the plan is not top-heavy.
New Comparability - The Conclusion:
When you pair new comparability with a self-directed brokerage account, such as those available through lowcost401k.com, you get the best of all worlds. You have unlimited investment freedom, and the maximization of tax-deductible contributions.
To obtain an analysis, all you need to do is request & complete a preliminary census. From there, lowcost401k.com can run a sample analysis that shows whether it makes sense for your firm or not.
If you would like a sample cost scenario of recent results of New Comparability, Cross-Tested, and Age-Weighted plans sent to you. Please contact us at lowcost401k.com.
Articles on this site are for guidance only. No intention, however phrased, to offer investment recommendations or tax advice is intended, should be inferred, or acted upon by the reader without due diligence. No guarantee of the accuracy of the content is given or inferred. It is our recommendation and the responsibility of readers that they make their own further independent investigations before making any investment decisions.
Visit 401klibrary.com to learn more about new comparability plans and other 401k topics.