Business owners often ask how they can skew retirement plan benefits to themselves or select employees. The Internal Revenue Code (“Code”) places restrictions on the ability of a sponsor of a tax-qualified plan to do so, and a plan will not be tax-qualified if it discriminates in favor of “highly compensated” employees (“HCE”). In general, such an employee is either a greater than 5% owner of the employer or an employee that earns more than $115,000 in the prior plan year. However, defined contribution retirement plan benefits can be maximized for owners or key employees through the use of a “new comparability” contribution formula to help satisfy the non-discrimination requirements of the Code.

With respect to employer contributions to a defined contribution retirement plan, the anti-discrimination rule generally means that if an employer provides a contribution to a plan on behalf of a HCE at a certain percentage of the HCE’s compensation, then the employer must provide a contribution to the plan on behalf of a non-HCE at the same percentage of compensation. This is known as a “pro rata allocation.”

By comparison, new comparability plans are more beneficial to the employer. This is because new comparability plans provide a maximum benefit for the HCEs or select employee group, while providing the lowest possible contribution for the non-HCEs or non-key group allowed by law. Since the select employees are often the business owner(s) and are older, they have less time to reach retirement age than do younger employees. Therefore, the select employees may receive a disproportionately greater share of contributions using this method, and the plans can be demonstrated to be non-discriminatory so that the tax-qualification rules of the Code are proved to be satisfied.

Tom Zgainer, Senior Vice President of Sales for ExpertPlan Inc, has helped more than 2,200 small businesses with their retirement plans over the past decade.