Using Variable 401K Contributions to Reward Performance

Your company thrives on its ability to retain and attract top performing employees—especially at the management level. But when you can’t increase salaries, what ways do you use to boost incentives and long-term earnings?

How about offering greater 401K profit sharing percentages to individual employees? Thanks to the guidelines on “New Comparability" updated by the IRS in 1994 and later in 2002, you can do just that.

According to Mark Brand, Esq., president and CEO of Actuarial Consulting Services, a collaborator of GCW Capital Group, under a typical New Comparability design, plan participants are divided into two or more groups. A plan sponsor can maximize the plan contributions to highly compensated employees (HCEs), often the older, higher-paid owners. One can then minimize allocations to younger, lower-paid employees.

“The traditional thinking was it offered a way to maximize contributions to people nearing retirement who were higher earners,” explains Brand. “But under the guidelines, it also is perfectly legal and ethical to use performance metrics as a category—provided it passes the IRS’s non-discrimination tests.”

Brand says that the revised New Comparability guidelines allow any employee to be dealt with individually, versus the flexible options designated just for higher earners, or employee groupings. And therein lies the potential big benefit for employers.

“Let’s say there’s an administrator who is crucial to the success and growth of a business,” says Brand. “You could create a bonus or incentive plan. But the cash value in the end is not nearly as valuable to the employee. You, the employer, also would be paying out more than 100 cents on the dollar after all taxes, FICA, and more.”

Instead, Brand says, consider using an annually determined extra 401K profit sharing percentage—giving the valued employee 100% of the amount to invest and grow until one day needed. Give someone $100 in profit sharing, and it starts at $100. Then it accumulates over time to something far greater.

What if that employee becomes less valuable to the business in a year or two or three? Are you stuck paying out a more valued amount when he or she is not fulfilling goals set up?

“No,” shares Brand. “The guidelines from the IRS allow you to review it annually, if desired, with that employee, and to adjust the percentages up or down, over time. Or to start offering more to a formerly less contributing employee who has stepped up and delivered.”

The fact that it requires a little extra work in advance of implementing such a program has made few firms enter the water, he says. “It takes some time in the beginning to work through all details and to set up a program that works for your particular business,” he admits. “So most firms don’t bother offering that service or counsel.”

After the initial work is done, he says, it can become fairly easy to administer and adapt such a program for your annual needs and incentives.

What’s it worth to you to attract and retain your top performers and employees? Find out more about this option today by contacting GCW Capital Group online, by phone at 716-256-1682, or by email at