| Contributions to Employee Groups. New Comparability Plans define different employee groups within the plan document. Employers make separate contributions to each employee group, and contributions are allocated to employees within their respective groups in proportion to salaries. |
| How to Define Groups. Employers have flexibility in defining groups as long as the groupings constitute a definitely determinable allocation formula. Below are examples of some approaches to defining groups. |
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Example 1 |
Example 2 |
Example 3 |
> Owners
> Other HCEs
> NHCEs |
> Physicians
> Nurses
> Office Managers
> Administrative Staff |
> Dallas Location
> Denver Location
> New York Location
> Seattle Location |
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| Discretionary Contributions. Contributions are generally discretionary each year, with the exception of contributions that may be required because of the Top Heavy Test and the General Nondiscrimination Test as discussed below. |
Impact of Compliance Testing |
| Plans cannot discriminate. If not for discrimination requirements provided by the Internal Revenue Service, employers could choose, without limitation, how much to contribute to each employee group. Current law, however, does not allow plans to discriminate in favor of highly compensated employees. The Internal Revenue Code deems traditional plans are not discriminatory, but requires other plans (including New Comparability Plans) to prove they do not discriminate by passing the General Nondiscrimination Test each year. |
| Cross Testing. The General Nondiscrimination Test uses a concept called Cross Testing, which converts today's contribution amounts into projected values at retirement age. Because of the time element involved in the projection, a younger participant will have a larger projected contribution than an older participant receiving the same contribution. This concept allows plans to make larger contributions for some participants and still pass the test. |
| 5% minimum required. The Gateway Test is part of the General Nondiscrimination Test and requires minimum contributions to non-highly compensated employees. To pass this part of the test, plans must make contributions to non-highly compensated employees equal to the lessor of (1) 5% or, (2) 1/3 of the highest contribution rate of any highly compensated employee. |
IMPORTANT CONSIDERATIONS |
| 5% may not be enough. It is important for plan sponsors to remember that 5% (or 1/3 amount discussed above) is only the minimum needed to pass the GatewayTest. Depending on the results of the Cross Testing, additional contributions may be needed for the plan to pass the other nondiscrimination tests. |
| Ages of employees important. Because of Cross Testing, the ages of employees is an important factor in test results. New Comparability works best in companies where owners and highly compensated employees are older, on average, than the non-highly compensated employees. |
| Employee turnover important. Companies with high employee turnover may experience problems in passing nondiscrimination testing, resulting in higher contributions in future years. |
| Number of employees important. Companies with smaller numbers of employees are more likely to have problems with testing, resulting in higher contributions in future years. |