New comparability is a profit-sharing formula that gives plan sponsors flexibility in how they allocate contributions across participants. This article covers what changes you can and cannot make to your new comparability profit-sharing formula. Expand the sections below to learn more.
New comparability is the most flexible profit-sharing formula available for 401(k) plans. It allows plan sponsors to allocate different profit-sharing amounts to each participant or to specific groups of participants.
Depending on a plan's census data, new comparability may allow owners and other highly paid participants to get higher contributions than they would under other profit-sharing formulas. However, plans that use this formula need to undergo additional nondiscrimination testing due to its complexity.
If you're interested in new comparability profit sharing, we will perform a calculation that maximizes the allocation to owners while keeping the overall allocation amount as low as possible.
Important: To help pass the required nondiscrimination testing, you can make only limited changes from what we propose. The more specific your requests are, the less likely the allocation will pass nondiscrimination testing.
While new comparability profit-sharing allocations are permitted in both the Core and Premium tiers, certain calculation requests may be subject to additional fees.
You can typically make these changes to your new comparability profit-sharing formula.
You can adjust the total profit-sharing amount so you're contributing closer to the total you want. This directly affects the individual amounts everyone gets.
With new comparability, not all participants have to get the same amount. If requested, one or more specified owners can get a larger amount than others. In general, the oldest owner will get the highest contribution. You can change which owners are targeted, but this may increase the total profit-sharing amount.
If you chose to allocate the same percentage to each owner, you can change that specific amount. This adjusts your overall profit-sharing amount.
You can also modify the formula so that only one owner is maximized, and other owners get as little as $0. This often results in a lower total profit-sharing amount and tends to be a more favorable scenario for non-owners.
These changes are harder to make because they often affect your plan's nondiscrimination testing.
You may be able to change the specific amount each non-owner participant gets to a certain extent. However, because the allocation still needs to meet nondiscrimination requirements, not all requested allocations are feasible.
Our calculations are designed to minimize the allocation to non-owners as a group. Decreasing the amount for a specific participant or participants changes the entire calculation and typically makes it much more difficult — or even impossible — to pass nondiscrimination testing.
All eligible non-highly compensated employees (NHCEs) need to get a minimum profit-sharing allocation, referred to as the minimum gateway. Some participants may require more than the minimum to allow the plan to pass coverage and average benefits testing.
Younger participants and those who get lower compensation are often targeted when additional contributions are required to keep the allocation as low as possible.