New Comparability Profit Sharing Plan: Maximize Owner Contributions With Employees

If you own a business with employees and want to contribute the maximum to your own retirement account, the standard "give everyone the same percentage" profit-sharing formula is expensive. A new comparability plan — also called a cross-tested plan — lets you legally allocate dramatically more of the profit-sharing contribution to yourself than to younger employees, because IRS nondiscrimination rules allow testing on a projected benefit basis rather than a raw percentage basis. The result: you can contribute 20–25% of your W-2 salary while your staff receives the 5% IRS minimum gateway — and the plan still passes testing.

The core problem: standard profit sharing is expensive with employees

Once you have full-time W-2 employees, a Solo 401(k) is off the table.¹ Your options shift to employer-sponsored plans — and if you want to reach the §415(c) maximum of $72,000 in 2026, you need to stack a profit-sharing contribution on top of your $24,500 employee deferral.²

The challenge: a standard pro-rata profit-sharing formula requires the same percentage for all participants. If you want a $47,500 employer contribution (to hit the $72K §415 cap), that's roughly 25% of a $190,000 W-2 salary. Contributing 25% for all employees would cost:

You wanted to put $47,500 away for yourself. Instead, you're spending $90,000 in total — $42,500 of which goes to employees. That's not a reason to avoid contributions, but it is a reason to look at a new comparability design.

What is a new comparability profit sharing plan?

A new comparability plan (also called a cross-tested plan) is a defined contribution plan that satisfies the IRS nondiscrimination requirement under IRC §401(a)(4) using a "cross-testing" approach rather than simple allocation rates.³

Here's the logic:

• Under a standard plan, nondiscrimination is tested by comparing allocation rates (employer contribution as % of compensation). HCEs and NHCEs must receive comparable rates.
• Under cross-testing, the IRS instead compares projected benefits at retirement age. The contributions are converted to an equivalent benefit using actuarial factors.
• Because a dollar invested at age 55 grows to a much smaller retirement benefit than a dollar invested at age 28 (over 37 fewer years of compounding), the older owner requires a much larger current contribution to produce an equivalent projected benefit as a younger employee.

This is not a loophole — it's the IRS's own framework for testing defined contribution plans where participants differ materially in age. Treasury Regulation §1.401(a)(4)-8 explicitly authorizes this approach.³

The gateway minimum: what employees must receive

Cross-testing isn't unlimited. Before the IRS permits cross-testing, the plan must satisfy a minimum allocation gateway: every non-highly compensated employee (NHCE) who benefits from the plan must receive at least one of:³

• 5% gateway: Each NHCE receives an allocation equal to at least 5% of their §415 compensation. If all NHCEs meet this threshold, the plan can use cross-testing without restriction (subject to the §415(c) $72,000 individual cap).
• 1/3 gateway: Each NHCE receives an allocation equal to at least one-third of the highest allocation rate provided to any highly compensated employee (HCE).

Most plans use the 5% gateway. It's simpler to administer and gives the owner the most flexibility at high contribution rates, since the 1/3 gateway would require 8.3% for NHCEs if you're contributing 25% for yourself.

Real planning example: 5% gateway, maximum owner contribution

S-corp owner, age 52, W-2 salary $190,000. Three employees in their 20s–30s. The plan uses a safe harbor 401(k) plus a new comparability profit-sharing layer.

Compare that to the $90,000 pro-rata table above. The new comparability design saves $34,000 in employee contributions while still putting the maximum in the owner's account.

Add the 401(k) layer (safe harbor 3% match on employee deferrals + owner's $24,500 deferral + $8,000 age-50+ catch-up = $32,500):

Note: with the $32,500 deferral + catch-up, the profit-sharing needed to hit the $72,000 cap drops to $39,500 (20.8% of $190,000), not $47,500 — which makes the 5% gateway even easier to clear on a cross-testing basis.

New comparability vs other retirement plan designs with employees

When new comparability works — and when it doesn't

It works well when:

• Owner is significantly older than employees. A 15–20 year age gap between the owner and most staff is the ideal scenario. The actuarial multipliers diverge enough that cross-testing produces strong results for the owner at minimum cost to the plan.
• Owner wants the §415 maximum ($72,000 in 2026). New comparability is the most efficient path to the annual additions cap when you have employees.
• Workforce is relatively small and young. The 5% gateway cost scales with total employee payroll. With 3–5 young employees earning $50,000–$70,000, the gateway cost is manageable ($10,000–$20,000 total).
• Owner wants to stack a cash balance plan on top. New comparability PS + cash balance is the classic "double-decker" combination for owners 50+ with high W-2 income and employees. The DC layer (up to $72K) and DB layer (up to $290K at §415(b) limit) are separate, and employees typically receive only the 5% PS gateway plus PBGC-mandated cash balance accruals.

It doesn't work well when:

• Owner and employees are similar ages. Cross-testing relies on age disparity. If employees are 40+ or close to the owner's age, the actuarial factors converge and cross-testing produces little advantage over pro-rata.
• Large workforce or high average wages. A 30-employee business with an average salary of $80,000 faces a 5% gateway cost of $120,000. At that scale, a more structured approach (traditional 401(k) with match-only design) may make more sense.
• Owner compensation is at or near the §401(a)(17) cap. The compensation limit is $360,000 in 2026.² An owner with $360,000 W-2 salary can contribute up to $72,000 in profit sharing without new comparability — because 25% × $288,000 + deferral = $72,000 ceiling. The cross-testing advantage is in the employee cost reduction, not increasing the owner's limit.

Section 199A QBI interaction

S-corp owners in the §199A QBI deduction phaseout range ($206,200–$256,200 single / $412,400–$462,400 MFJ in 2026, per OBBBA-expanded thresholds) should note that the W-2 wages limitation uses the higher W-2 wages of the business to support a larger QBI deduction. Allocating more of the profit-sharing contribution to the owner (who is also the W-2 wage earner) does not reduce the business's W-2 wages as reported on Form W-3 — the employer profit-sharing contribution comes from the business's deductible expense but is separate from the wage line on the W-2. A specialist advisor can optimize the W-2 salary level for both FICA savings and QBI wage support simultaneously.

Administration: what's required

• Third-party administrator (TPA) required. New comparability testing uses actuarial equivalence calculations that must be performed by a qualified TPA. This is not a DIY plan. Annual TPA fees typically run $1,500–$4,000+ for a plan with a small number of participants, plus Form 5500 preparation.
• Annual cross-testing. The TPA must run the cross-test each plan year to verify nondiscrimination compliance before allocating contributions. The testing can fail if the workforce changes (e.g., older employees hired who become NHCEs and dilute the age gap benefit).
• Plan document must include new comparability language. Standard 401(k) plan documents default to pro-rata profit sharing. The plan must specifically include a "grouping" or "cross-tested" allocation formula — this is set up at plan inception or via plan amendment.
• Contribution deadline. Employer profit-sharing contributions (including new comparability allocations) must be deposited by the employer's tax filing deadline including extensions — generally September 15 for S-corps or October 15 for partnerships. Contributions made by that date are deductible for the prior tax year.
• Vesting schedule. Unlike safe harbor contributions (which vest immediately), the profit-sharing layer can use a vesting schedule of up to 6 years. Employers can use this to reduce the actual cost for employees who leave early — a 3-year cliff or 6-year graded schedule keeps the economics tight for the owner.

New comparability + cash balance: the double-decker stack

The most aggressive legitimate tax-deferral structure for a business owner age 50+ with employees is:

1. Safe harbor 401(k): Owner defers $24,500 + $8,000 catch-up (or $11,250 ages 60–63) = $32,500–$35,750. Employer matches 3–4% of employee deferrals (meets safe harbor, eliminates ADP/ACP testing).
2. New comparability profit sharing: Owner gets profit-sharing contribution up to §415 headroom ($72,000 − deferral). Employees get 5% gateway minimum. TPA runs cross-test annually.
3. Cash balance plan (defined benefit): A separate DB plan stacked on top of the DC plan. The owner's cash balance contribution is actuarially set based on age and target benefit — often $150,000–$290,000/yr at age 55–65, per §415(b).⁴ Employees receive a minimum cash balance accrual (typically the §401(a)(26) minimum of 0.5%/yr of compensation or the "broadly available" safe harbor).

Total tax-deferred contributions for an owner age 58 with $400,000 in W-2 income, 5 young employees:

• 401(k) deferral + catch-up: $32,500
• New comparability profit sharing: $39,500 (to hit $72,000 §415 cap)
• Cash balance plan (actuarial, age 58): ~$220,000
• Total: ~$292,000 annual federal tax deferral

At a 37% combined federal marginal rate, that's roughly $108,000 of federal income tax deferred per year. This level of tax advantage is only achievable with this specific combination of qualified plans.

Common mistakes

• Using new comparability without a safe harbor 401(k). If the 401(k) portion also requires ADP testing and the owner is the only HCE, passing both the deferral test and the profit-sharing cross-test in the same year is harder. Adding a safe harbor component eliminates the deferral test and simplifies administration significantly.
• Forgetting the 5% gateway. Some plan sponsors allocate employer contributions to the owner only, then discover the NHCEs received nothing — failing the gateway. The TPA must confirm every benefitting NHCE has received at least 5% before the plan year closes (or by the contribution deadline).
• Not updating the plan document when adding new comparability. Many businesses start with a standard 401(k) plan document (basic or safe harbor, pro-rata profit sharing). Converting to new comparability requires a plan amendment. Operating a plan inconsistently with its document is an IRS violation correctable only via EPCRS.
• Assuming one TPA handles both DC and cash balance. Some TPAs don't handle actuarial DB work. If adding a cash balance plan, verify your TPA (or a new one) has the actuarial capacity for both plan types — the DB valuation requires an enrolled actuary.
• Ignoring the employee retention effect. A new comparability plan with a 6-year graded vesting schedule on the profit-sharing layer creates an exit penalty for employees. This can be intentional (reduces cost when employees leave) or accidental (creates a retention trap with unintended consequences). Be intentional about the vesting design.

Sources

1. IRS — One-Participant (Solo) 401(k) Plans. Solo 401(k) is for businesses with no employees other than the owner and/or their spouse; once a full-time W-2 employee is added who is eligible to participate, the Solo structure no longer applies.
2. IRS Notice 2025-67 — 2026 Retirement Plan Dollar Limits. §415(c) annual additions limit $72,000; §401(k) elective deferral $24,500; §401(a)(17) compensation cap $360,000; §414(q)(1)(B) HCE threshold $160,000; catch-up $8,000 (age 50+), $11,250 (ages 60–63).
3. Treas. Reg. §1.401(a)(4)-8 — Cross-Testing, via Cornell LII. Authorizes testing defined contribution plans on a projected-benefit basis; §1.401(a)(4)-8(b)(1)(vi) establishes the minimum allocation gateway (5% of compensation OR 1/3 of highest HCE allocation rate).
4. IRS — Cash Balance Pension Plans. Stacking a cash balance (defined benefit) plan with a defined contribution plan; §415(b) annual benefit limit $290,000 for 2026; PBGC premium requirements for insured plans.
5. IRS — 401(k) Limit Increases to $24,500 for 2026. Elective deferral limit, IRA limit, HCE threshold, catch-up limits, and compensation cap confirmed for 2026.

Contribution limits verified per IRS Notice 2025-67 as of June 2026. Cross-testing rules per Treas. Reg. §1.401(a)(4)-8. New comparability plans require annual TPA administration — limits and testing methodology should be confirmed with a qualified retirement plan administrator each year.