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New Comparability Plans

One of the most common goals for a retirement plan is to provide a savings vehicle for the company’s owner(s) and their employees. However, one problem—the IRS caps the amount of annual contributions participants can make. For employers, highly compensated employees and near-retirees looking to ramp up retirement savings, plan limits can create roadblocks. But, there are other options.

Enter the New Comparability Plan

They are profit-sharing plans designed so owners, highly-compensated employees and older workers can receive higher contribution amounts while minimizing allocations to the accounts of younger, lower-paid employees.

Here’s how they work. (see Table 1).

  • Employees are divided into two or more groups based on age, length of service and/or compensation
  • Each group in the plan receives a different level of contributions
  • The separate groups are spelled out in the plan document while the contribution percentage can be determined each year
  • Contributions are based on the benefit of those contributions at retirement
 Non-elective Safe Harbor Traditional Profit SharingAge-Weighted Profit SharingNew Comparability
 SalaryTitleAge% of PayContribution Allocated% of PayContribution Allocated% of PayContribution Allocated% of PayContribution Allocated
Alex$150,000Owner503%$4,50010%$15,00018%$27,00025.6%$38,500
Charlie$150,000Owner503%$4,50010%$15,00018%$27,00025.6%$38,500
Sadie$70,000Director503%$2,10010%$7,00018%$12,60010%$7,000
Murphy$40,000Manager303%$1,20010%$4,0008%$5,0005%$2,000
Lola$30,000Manager223%$900  10%$3,0006%$1,8005%$1,500
Employer Total    $13,200 $44,000 $71,300 $87,500

Sample Comparison

*Illustrative purposes only. Consult your TPA for specifics.

New Comparability Plans solve the issue of age-weighted plans where a 50-year-old owner can receive the same allocation as a 50-year-old worker. However, by dividing the company into different groups of workers, this plan type allows the 50-year-old owner to get a greater allocation than the 50-year-old worker.

What types of companies can benefit from a New Comparability Plan?

Commonly used by small companies (generally fewer than 50 employees), plan decision makers could add New Comparability Plan design to an existing 401(k) plan and dramatically increase employer contributions to their owner(s). The plans work in many environments, but especially when there is a wide disparity in compensation and age between the owner and their key employees and the rest of the workforce.

New Comparability Plans can benefit a company if the owner:

  • Wants to maximize employer contributions to themself and their executive team
  • Is generally older than the rest of their employees
  • Has a higher salary than most of their employees
  • Wants to reward older employees

Table 1 illustrates how a New Comparability Plan gives this company’s owners Alex and Charlie 25.6% of their salary which equates to $38,500 or 88% of the total employer contribution of $87,500.

Drawbacks

Critics say that New Comparability Plans are unfair since they benefit older, higher-compensated employees at the expense of younger, lower-paid employees. So the plans must pass strict non-discrimination testing—a special IRS general test.

The plan must pass nondiscrimination tests each year to show they don’t discriminate in favor of the highly compensated employees, which, of course, includes the owner.

New Comparability Plans satisfy the test by requiring minimum contributions and then having the plan pass a series of tests to show that the projected benefits for each employee group meet the coverage requirements. The test can be complicated and difficult to pass, so it’s important to design the plan properly so it can pass.

Are they for you?

A New Comparability Plan can help you as the owner of a small business to direct the bulk of your company’s contributions back to you, with certain restrictions imposed by the non-discrimination test.

It can be an attractive option depending on your company’s demographics and compensation structure. Be mindful of start-up fees and increased annual administrative fees. Check with your TPA to ensure they’re able to handle the plan’s complexities. Even so, a New Comparability Plan can provide you a lot of flexibility in designing your retirement and compensation package. They’re not for everybody but are certainly worth looking into.

PENSION PLAN SPECIALISTS, PC

805 Broadway, Suite 600

Vancouver, WA 98660

360-694-8409

pensionplanspecialists.com

[email protected]

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

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Boosting Profits and Savings: 5 Tax Strategies for Business Owners

For business owners, striking a balance between operating costs and profit is the cornerstone of success.

Operating costs include everyday expenses like salaries, rent and supplies. Profit, on the other hand, is what remains after all these operating costs have been paid. It’s the reward for the risks taken and the value created by your business. Often, savvy business owners will look to tax strategies to help find the sweet spot, where operating costs are managed efficiently while maximizing profit.

By utilizing tax-friendly strategies, owners can reduce their tax liability, effectively boosting profits without increasing sales or cutting costs. Let’s delve into some of these strategies and explore how they could potentially bolster your business’s financial health, reduce taxes and help you save for retirement.

5 Tax Strategies to Consider

  1. Max Out Retirement Plan Contributions

Maximizing contributions to your retirement account reduces taxable income. If you are not maxing out your retirement plan each year, you’re missing out on a significant tax advantage. The IRS adjusts the contribution limit annually with an extra boost of catch-up contributions.[1] 

  • Profit Sharing Contributions

A profit sharing plan allows employers to make contributions to retirement savings accounts based on the company’s profits. This incentivizes employees and provides tax benefits for the business.

Example

Murphy’s Motors is a small business with two owners, both aged 57, and a diverse team of 20 employees. Murphy’s Motors had a profitable year and wants to fund $110,000 into the profit sharing plan. After talking with their Third-Party Administrator (TPA), the owners learn they can allocate $43,500 into one of the owner’s accounts, $43,500 into the other owner’s and $23,000 into eligible employees’ accounts.

  • Cash Balance Plan

These are types of defined benefit retirement plans. They offer an advantage to business owners by allowing them to contribute substantially larger annual amounts in comparison to other retirement plans, such as 401(k)s.

Example

The owners of Murphy’s Motors are eager to accelerate their retirement savings. They each anticipate compensation of $250,000 for the current year. After maximizing their 401(k), catch-up and profit sharing contributions, they aim to each contribute and deduct an additional $100,000 toward their retirement savings. Upon consulting with their TPA, they discover that to achieve their combined savings goal of $200,000, they will need to contribute $50,000 toward their employees’ retirement plans. This results in a substantial $250,000 tax deduction for their business.

  • Health Savings Account (HSA)

An HSA is a tax-advantaged medical savings account for individuals enrolled in a high-deductible health plan (HDHP). Contributions to an HSA reduce taxable income. The funds grow tax-free and withdrawals for qualified medical expenses are tax-free. HSA contribution limits vary, they are dependent on coverage and age.[2]

  • Hiring Family Members

While this may sound odd, hiring family members can be an effective tax strategy for business owners. By employing family members, you can transfer income from a higher to a lower tax bracket, potentially reducing your overall tax liability. The wages paid for legitimate work are deductible business expenses.

Example

Consider Joan Murphy, co-owner of Murphy’s Motors. She employs her teenage son, Alex, for daily operations at the shop. Alex’s wages are now a deductible business expense. If his earnings stay under the standard deduction of $13,850, they remain tax-free. Consult your tax professional for detailed advice. Every business is unique, with its own specific challenges, opportunities and goals. That’s why we’re here to help you explore these potential strategies, understand their implications and implement the ones that are right for you.

PENSION PLAN SPECIALISTS, PC

805 Broadway, Suite 600

Vancouver, WA 98660

360-694-8409

pensionplanspecialists.com

[email protected]

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

[1] Internal Revenue Service. “Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits.”

[2] Internal Revenue Service. “Health Savings Accounts and Other Tax-Favored Health Plans.“

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Retirement Plan Review: From Participation Rates to SECURE 2.0

Gain actionable insights for optimizing efficiency and compliance through strategic plan analysis.

It’s no secret that when you conduct a retirement plan review, you have a chance to understand the data and trends, which can help your plan be efficient and compliant. To set your plan up for success and see if changes are needed, it’s important to make the most of this analysis. Here are some key components to focus on.

Your plan’s current participation rate 

One piece of the plan health puzzle is your current retirement plan’s participation rate as it is a key signal of the retirement plan’s effectiveness. When paying attention to these metrics, you may gain insights into the level of employee engagement and identify opportunities, especially when you consider the possibilities of implementing automatic features, while making other plan design changes and thinking about how employees engage with their retirement plan.

  • Aim for 90% or greater

Deferral rate statistics

Equally significant are your retirement plan data trends, especially deferral rates, which are crucial for optimizing the financial well-being of plan participants. Understanding deferral rate data helps you know if employees are making informed decisions about their contributions. It also reveals opportunities for more effective education and communication. Much like participation rates, deferral rates can highlight opportunities for plan design modifications. 

  • Aim for 10% or greater

Effective asset allocation and potential for re-enrollment 

Effective asset allocation is another key statistic that plays a pivotal role in the performance of retirement portfolios. By evaluating the asset allocations across participating employees, you can identify opportunities to align strategies with investment goals, risk tolerance profiles, and market conditions. Analyzing the asset allocation data can reveal opportunities like re-enrollment, which can be a valuable endeavor long-term.

  • Aim for 90% or greater

Re-enrollment allows employees to reselect their investment options or be enrolled in a Qualified Default Investment Alternative (QDIA). This process offers participating employees a fresh chance to look at how they are allocated and consider a more suitable investment strategy.

Auto-enrollment and auto-escalation 

Auto-enrollment can be a great streamlining tool to help savers achieve retirement readiness and increase participation in your plan, especially if encouraging employees to take positive actions has traditionally been a challenge. Aside from other benefits to the employee population, auto-enrollment can be an effective tool to improve recruitment and retention, unlock tax credits, and help with compliance testing. 

Auto-escalation is an effective feature that incrementally raises plan contributions over time (e.g., increasing by 1% annually up to a maximum of 15% annual deferral). This approach not only has the potential to lower payroll taxes, but also, akin to auto-enrollment, facilitates employee retention by overcoming the usual roadblocks of getting employees to take positive action.

SECURE 2.0 2025 amendments

SECURE 2.0 legislation and the amendments going into effect in 2025 are shining a brighter spotlight on the already-prevalent auto features. Your retirement plan review is a good time to discuss options and consider implementation. The regulatory implications of the 2025 SECURE 2.0 amendments are significant. Mandated automatic enrollment is bound to have an effect on plan health, as will the ability of part-time employees to qualify for participation after 500 hours in two years as opposed to the previous three. For more SECURE 2.0 updates, contact us to discuss your plan.

Important deadlines 

If you are considering making plan design changes, it is crucial to discuss implementation dates and deadlines. Keep in mind that amending your plan and communicating changes to participants takes a proactive approach. For example, take the deadline of October 1 to establish a new Safe Harbor 401(k). Note that the plan must have deferrals for at least three months to be considered Safe Harbor for the current year. On the other hand, a 2025 Safe Harbor implementation requires that a 30-day notice to employees goes out by December 1st. 

The retirement plan review is your time 

Reviewing your retirement plan data empowers you to make informed decisions and adjustments for the coming year, thereby fostering confidence in your plan’s health. By evaluating current metrics and seizing opportunities, you can enhance efficiency, boost employee participation and satisfaction, and help future-proof your offering.

PENSION PLAN SPECIALISTS, PC

805 Broadway, Suite 600

Vancouver, WA 98660

360-694-8409

pensionplanspecialists.com

[email protected]

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

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Plan Sponsor Guide: Crafting an Effective and Competitive 401(k) Plan

Ready to elevate your workplace retirement plan strategy? Discover strategies that can take your plan beyond a financial obligation to become a catalyst for fostering a motivated, loyal team. Consider implementing features like auto-enrollment and auto-escalation to improve savings and participation rates and position your plan to boost retention and encourage on-time retirements.

PPS-Effective-401k-Plan-GuideDownload

PENSION PLAN SPECIALISTS, PC

805 Broadway, Suite 600

Vancouver, WA 98660

360-694-8409

pensionplanspecialists.com

[email protected]

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements; you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC.  All rights reserved. Proprietary and confidential.  Do not copy or distribute outside original intent.

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Exploring In-Plan Retirement Income Solutions

To help prevent potential retirement delays, consider retirement income solutions to boost participants’ confidence in their future financial security.

Both employers and employees have a growing interest in in-plan retirement income solutions. With 66% of participants concerned about creating an income stream in retirement, this shows a signification interest in retirement planning tools that can convert savings into lifetime income.[1]

Offering in-plan retirement income solutions is one way to help participants plan for financial stability in retirement in order to retire on time. Why focus on in-plan retirement income solutions, and why now? Here’s what you need to know.

The growing need for retirement income

With the decline of pension plans and the rise of DC plans like 401(k)s, the responsibility to create retirement security has shifted from employers to employees. However, for many participants, saving is a challenge. If they manage to save enough for retirement, participants aren’t confident in converting their assets to a steady stream of retirement income they won’t outlive. Eighty-seven (87%) of participants expressed a desire for an in-plan retirement income solution to help them achieve their goals.[2]  Moreover, today’s workforce is aging, requiring solutions that help provide a sustainable retirement income for as long as they live.

In an effort to boost retirement income success, there is an opportunity to support participants with income planning for the decumulation stage. Education is critical to improving retirement readiness: participants need to understand how retirement income solutions work and how to use them appropriately. Employers can leverage plan features like in-plan retirement income solutions to make their retirement benefits more competitive, increase employee engagement, and retain valuable talent. Few organizations currently offer this option, making it an opportunity to stand out as an employer of choice.

Plan design plays a pivotal role

Thoughtful plan design can significantly impact participants’ retirement income. Features such as default deferral rates, employer matching contributions, and professionally managed investment solutions all play a pivotal role:

  • Default deferral rates often steer participant contributions. Many plans automatically enroll employees at the deferral rate of 3% of their salary, but most employees choose to “set it and forget it” and never increase their contributions beyond that amount. Plans with higher default deferral rate and auto-escalation, where contributions are increased at set intervals until a preset maximum is reached, promote saving more over time.  This approach potentially boosts their retirement income.
  • Matching contributions can substantially boost participants’ retirement savings. Encourage participants to contribute at least enough to receive the full employer match and maximize this benefit.
  • Professionally managed investment solutions alleviate the burden of establishing a personal asset allocation strategy, constructing a portfolio of equities and fixed income, and then monitoring and updating it on an ongoing basis. The most common retirement plan default investment solutions are target date funds and managed accounts.

PENSION PLAN SPECIALISTS, PC

805 Broadway, Suite 600

Vancouver, WA 98660

360-694-8409

pensionplanspecialists.com

[email protected]

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

[1] Voice of the American Worker 2024. Franklin Templeton. 2024.

[2] Voice of the American Worker 2024. Franklin Templeton. 2024.

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Plan Design for an Age Diverse Workforce

Discover insights into retirement plan design for a multigenerational workforce. Find out ways to boost retirement readiness and deal with issues unique to each generation. Understand the best methods of retirement saving from Baby Boomers to Gen Z.

Download the Guide

PENSION PLAN SPECIALISTS, PC

805 Broadway, Suite 600

Vancouver, WA 98660

360-694-8409

pensionplanspecialists.com

[email protected]

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

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