Companies like including a profit sharing contribution in their 401(k) plans because they're a great way to reward employees, typically without increasing their taxable income. However, because of IRS requirements, most plans require that you contribute the same percentage of pay to each employee's account to avoid discrimination, meaning business owners can't pay more into their own account or those of higher paid employees. That's where new comparability plans come in.
Important note: Although Roth profit sharing contributions are legally allowed currently, it is not offered by many plans and we will assume they are pre-tax for the rest of this discussion.
New comparability profit sharing formulas are special because you can allocate to each participant separately, and essentially customize the profit sharing contribution for each one, so long as certain tests show that the contributions don't discriminate against non-highly compensated employees, known as non-HCEs, in the long run.
401(k) profit sharing
First, a refresher on how profit sharing works. In the context of retirement, profit sharing involves an employer making tax deductible contributions to employees' 401(k) accounts.¹
Despite the name, they don't necessarily have to do with company profits. Think of it as a bonus deposited directly into employees' retirement accounts. Profit sharing comes with a slew of benefits for employers and employees alike—learn about those here.
There are a few different ways to calculate who gets what. For example, you can give everyone the same, flat dollar amount. If you want to give high-earners more, you can instead tie the contribution to a flat percentage of employee pay (known as pro rata). But sometimes business owners and executives want an even bigger percentage of pay. In cases like these, neither method cuts it.
New comparability plans have a different way of calculating contributions, so you may be able to reward these critical employees without running afoul of nondiscrimination testing.
Cross-testing
New comparability plans work because of cross-testing. Rather than gauge whether a profit share is discriminatory on the dollar value at the time of contribution, cross-testing uses a benefit accrual rate, which projects the possible future value of the contribution at at the individual’s retirement age.
In many cases, non-HCEs will have projected future values that are similar or even higher to their high-earning peers, even if their current profit sharing allocations are significantly less.
Here's a sample contribution setup where a small business owner is 50 years old with a high income. Using new comparability, the owner can receive a larger contribution than younger, lower income employees.
Participant | Age | Salary | Contribution % |
Owner | 50 | $200,000 | 10.0% |
Alice | 25 | $40,000 | 3.33% |
Bob | 30 | $60,000 | 3.33% |
Carrie | 35 | $80,000 | 3.33% |
These are hypothetical examples for illustrative purposes only and do not represent any current or past client accounts.
Whether or not this works depends on your company's demographics. New comparability tends to work best when there's a meaningful gap between the owners you're looking to reward and the rest of your workforce. Age is the biggest driver: because cross-testing measures a projected benefit at retirement, an older owner can justify a larger current contribution, while a younger non-HCE's smaller contribution has more years to grow into a comparable projected benefit. A meaningful pay gap helps too, as the wider the difference between owner and employee compensation, the more room there typically is to have more of the contributions go to owners while still passing nondiscrimination testing. If owners are close in age and compensation to the rest of the team, new comparability may not produce much advantage over a standard pro-rata or flat-dollar formula.
New comparability plans may be a great way to maximize tax and retirement savings3 for older, higher paid owners or employees.
Going further, new comparability profit sharing can be a great option for your small business if:²
You'd like to maximize employer contributions3 made to owners or executives
Owners are generally older than non-owner employees
Owners have a higher salary than non-owner employees
Gateway requirements
As part of the new comparability allocation formula, a minimum gateway requirement has to be met. Each non-HCE must receive at least the gateway amount as a profit sharing allocation. The gateway amount is the lesser of:
One-third of the highest contribution rate given to any HCE, or
5% of the participant's gross compensation.
Note that if your plan is a Safe Harbor 401(k) plan where a safe harbor non-elective contribution is being made (minimum of 3% of compensation to all eligible participants) - those contributions not only count toward the minimum gateway, but also have the added benefit of allowing the plan to automatically satisfy most nondiscrimination testing.
While non-HCEs may still need to get a profit sharing allocation beyond the safe harbor non-elective contribution, pairing a new comparability profit sharing component with a safe harbor non-elective contribution can help business owners maximize employer contributions3 to themselves (and other targeted employees) while still passing non-discrimination testing.
New comparability plans offer a lot of flexibility for small businesses looking to reward owners and other HCEs. But between the rigorous testing and maintenance, setting them up can seem daunting. You don't have to do it by yourself — learn how Gusto 401(k) can help.
FAQs
What is new comparability profit sharing?
New comparability profit sharing is a type of profit sharing allocation formula that allows employers to make different contribution percentages to different employees — possibly including significantly higher contributions to business owners and executives — as long as IRS nondiscrimination tests are satisfied. Unlike standard profit sharing (which requires the same contribution rate for everyone), new comparability uses "cross-testing" to evaluate whether contributions are equitable on a projected retirement benefit basis, not just current dollar amounts.
How does cross-testing work?
Instead of comparing current contribution amounts directly, cross-testing projects each employee's profit sharing contribution forward to their retirement age and compares the projected benefits. Because younger employees have more years for their contributions to grow, a smaller current contribution to lower paid employees can result in an equivalent or higher projected benefit at retirement — allowing the plan to pass nondiscrimination requirements even when owners receive a larger percentage today.
Who is new comparability profit sharing best suited for?
It works best for businesses where owners or key executives are significantly older and/or higher-paid than most other employees. The age gap is critical. Cross-testing relies on the time value of money, so younger employees' smaller contributions have more years to grow and can match the projected value of a larger contribution made to an older owner. If owners and employees are similar in age or pay, the math may not work.
What are the gateway requirements to qualify for new comparability?
Before cross-testing can be applied, employers must meet a minimum gateway by contributing to all non-HCEs the lesser of: (1) one-third of the highest contribution rate given to any highly compensated employee (HCE), or (2) 5% of the participant's gross compensation. Non-HCEs can receive an allocation greater than the gateway. This ensures non-highly compensated employees receive a meaningful baseline contribution.
Can I combine new comparability profit sharing with a Safe Harbor 401(k)?
Yes, and it's often the recommended approach. A Safe Harbor 401(k) nonelective contribution counts toward the minimum gateway requirement and also automatically satisfies most nondiscrimination testing. Combining a 3% Safe Harbor nonelective contribution with a new comparability profit sharing layer lets business owners maximize contributions to themselves3 while generally satisfying gateway requirements for most non-HCEs in one structure.2
Disclosures
¹ This content is for informational purposes only and is not intended to be taken as tax advice. Please contact a tax professional for further information.
² For informational purposes only. This should not be considered financial, tax, or legal advice. Contact a financial professional to evaluate what retirement plan is best suited for your situation.
3 Contributions for any individual are subject to an annual limit of $72,000 for 2026 (includes deferrals and employer contributions but excludes catch-up contributions).
