Changes to Internal Revenue Code regulations in the early 1990’s gave rise to a new type of plan design called New Comparability. This plan design allows an employer to adopt a formula that provides higher allocations to certain employees based on a “class or group”. The employer decides which groups get which allocations. The allocation formulas adopted by the plan for the various groups must pass the required discrimination testing mandated by the IRS.
Essentially, this design is attractive to small business owners where they are—as a class or group—typically older than the rank and file employees. The graph below provides a comparison of the percent of the total contribution given to the owners for 4 different plan designs. In this scenario, Owner A and Owner B are considered Highly Compensated Employees (HCE), the remainder of the employees are considered to be non-highly compensated employees (NHCE). Note the larger percentage given to the HCEs in the New Comparability Plan.
The plan design above is a defined contribution profit sharing plan. Contributions to the plan are made at the employer’s discretion. If business is bad in a given year, the company does not have to make a contribution to the plan as contributions are “discretionary”.