Your 401(k) lets you defer $24,500 of salary in 2026. But the IRS actually permits up to $72,000 per person, per year, into a defined contribution plan. That $47,500 gap is filled by employer contributions — and in most small-business plans, the owner gets the exact same percentage as every employee. If you are the owner, that default is quietly costing you tens of thousands in tax-advantaged savings every year.
New comparability profit sharing — also called cross-tested plans — exists to fix exactly that. It lets you divide employees into groups and give the ownership group a much bigger contribution rate than the staff group, while still passing IRS nondiscrimination testing. Here is how it works, what it costs, and when it beats every other formula.
Why Standard Profit-Sharing Formulas Shortchange Owners
In a typical small-business 401(k) with profit sharing, the employer contribution follows one of three formulas:
- Flat dollar: everyone gets the same amount, say $2,000. Simple, but the owner gets no more than the receptionist.
- Pro rata (same percent of pay): everyone gets, say, 5% of compensation. The owner of a business paying themselves $360,000 gets $18,000 — while funding 5% for the entire payroll.
- Integrated (permitted disparity): contributions above the Social Security wage base ($184,500 for 2026) get a slightly higher rate, to account for the employer Social Security tax paid on wages below it. Better for owners, but the extra margin is small — generally under 6 percentage points.
All three share one trait: the owner's rate is locked to everyone else's. To contribute $47,500 to your own account under a pro-rata formula at a $360,000 compensation cap, you would need a 13.2% allocation rate — and you would owe 13.2% of pay to every eligible employee. On a $300,000 staff payroll, that is nearly $40,000 of staff cost to fund your own maximum. Most owners understandably decline, and the gap between the $24,500 deferral limit and the $72,000 overall limit goes unfilled year after year.
How Cross-Testing Unlocks Unequal Contributions
New comparability plans escape this trap through cross-testing, a testing method blessed by Treasury regulations (Section 1.401(a)(4)-8). Instead of comparing what everyone receives today, cross-testing compares the projected value of each person's contribution at retirement age — the equivalent benefit accrual rate.
That single shift changes everything, because time does the heavy lifting for younger employees. A 30-year-old receiving a 4% contribution has 35 years of compounding before age 65; a 55-year-old owner needs a far larger contribution today to end up with the same projected benefit. The math therefore lets the older, higher-paid group receive dramatically more now while the plan still demonstrates that everyone is on track for a comparable benefit later.
In practice, the plan document divides participants into allocation groups — commonly "owners" and "everyone else," though you can create finer slices such as owners, managers, and staff. Each group gets its own contribution rate. A third-party administrator (TPA) then runs the cross-test each year to confirm the rates pass.
What the Numbers Can Look Like
Consider a hypothetical firm: a 55-year-old owner earning $360,000 (the 2026 compensation cap), plus three employees ages 28 to 35 earning a combined $180,000.
- The owner defers $24,500 plus an $8,000 age-50 catch-up ($32,500 total; catch-up contributions do not count against the $72,000 limit).
- The plan allocates the owner an employer contribution of $47,500 — 13.2% of capped pay — bringing the owner's total annual addition to the $72,000 maximum.
- Each staff member receives 4.4% of pay, costing roughly $7,900 in total.
So about $7,900 of staff contributions unlocks $47,500 of deductible employer contributions for the owner. Under a pro-rata formula, that same $47,500 owner contribution would have required 13.2% for everyone — over $23,700 in staff cost. The demographics do the work: the wider the age gap between owners and staff, and the wider the pay gap, the more of each profit-sharing dollar flows to the ownership group.
The Gateway: The Minimum Your Staff Must Receive
Cross-testing is not a blank check. Before the projected-benefit math even applies, the plan must pass the minimum allocation gateway: every non-highly compensated employee (NHCE) must receive at least one-third of the highest contribution rate given to any highly compensated employee (HCE) — or 5% of pay, which automatically satisfies the gateway no matter how high the owner rate goes.
In the example above, one-third of the owner's 13.2% is 4.4%, so the staff rate clears the gateway without reaching 5%. If the owner took a 25% allocation, one-third would be 8.3% — and most sponsors would instead use the flat 5% safe harbor, since 5% of staff pay is cheaper than 8.3%.
A few gateway facts that trip up first-time sponsors:
- Who counts as highly compensated? For 2026, anyone owning more than 5% of the business, plus anyone who earned more than $160,000 in the prior year (the threshold held steady from 2025). Everyone else is an NHCE.
- Safe harbor 3% contributions count toward the gateway. If your 401(k) already makes a 3% safe harbor nonelective contribution, you only need to top staff up from 3% to the gateway rate — a 5% gateway costs just 2% more. This is why new comparability pairs so well with safe harbor plan designs.
- Top-heavy rules stack on top. If key employees hold more than 60% of plan assets — common in owner-heavy firms — the plan is top-heavy and generally owes non-key employees a minimum 3% of full-year compensation. In practice the gateway rate (often 5%) exceeds this, but you must satisfy both tests, and employee elective deferrals never count toward the top-heavy minimum.
- The deduction has its own ceiling. Employer contributions to a defined contribution plan are deductible only up to 25% of the compensation paid to eligible participants. With the owner's capped pay included, most small firms have ample room — but verify it before finalizing rates.
When New Comparability Wins — and When It Loses
New comparability tends to pay off handsomely when:
- Owners are meaningfully older than staff. Age is the single biggest driver of cross-test results. A 55-year-old owner with a 30-year-old workforce is the textbook case.
- Ownership is concentrated. Solo owners, partner groups, and family businesses with a small high-paid tier capture the most benefit per staff dollar.
- You already make safe harbor contributions. The 3% nonelective base covers more than half of a typical 5% gateway, shrinking the incremental cost.
- You want contribution flexibility. Profit sharing is discretionary — despite the name, it does not require actual profits. In a lean year you can contribute nothing; the gateway only applies in years you fund the plan.
It often disappoints when:
- Staff are older than the owners. A 40-year-old founder with 55-year-old key employees will find cross-testing gives the advantage to the staff, not the founder.
- Turnover is high. Every eligible employee must receive the gateway minimum, including short-tenure workers who vest (or partially vest) and leave. Vesting schedules help — unvested forfeitures can offset future contributions — but the cash still goes out the door each year.
- The workforce is large relative to ownership. Gateway cost scales with staff payroll. At some headcount, the staff bill exceeds the owner's tax savings, and a simpler design wins.
- You balk at administration costs. Cross-tested plans need a TPA to run allocation modeling and annual testing. That is a real yearly fee on top of recordkeeping — worth it when it unlocks $30,000+ of extra owner contributions, but overhead if the demographic advantage is thin.
Age-weighted plans are the closest alternative: they use a formula driven purely by age, so an older owner automatically gets more. But they cannot distinguish between two people of the same age — a 50-year-old owner and a 50-year-old employee get identical treatment. New comparability's allocation groups solve that, which is why it has largely supplanted age-weighted designs at small professional firms.
Five Mistakes That Blow Up Cross-Tested Plans
1. Adopting the design midstream without coverage modeling. New comparability must still pass the 410(b) coverage test — generally, at least 70% of NHCEs must benefit. Carving groups too aggressively, or excluding part-timers who must be covered, fails the plan before cross-testing even runs. Model the census with your TPA before amending the plan document.
2. Forgetting the top-heavy minimum in a zero-contribution year. Skipping profit sharing in a bad year is allowed — but if the plan is top-heavy, the 3% non-key minimum is still owed. Sponsors who "turn off" contributions and forget the top-heavy obligation end up making corrective contributions with lost earnings.
3. Breaching the 25% deduction limit. Total deductible employer contributions cannot exceed 25% of eligible participants' compensation. Firms with modest payrolls relative to owner pay should confirm headroom, especially when combining profit sharing with a defined benefit plan.
4. Misidentifying HCEs after a headcount change. The $160,000 compensation test uses prior-year pay, and the 5% ownership test catches family attribution (a spouse's or child's ownership can attribute to you). One misclassified employee invalidates the whole test.
5. Designing groups that only benefit the HCEs. The IRS has warned that plan designs meeting every mechanical checklist can still violate Section 401(a)(4) if they primarily benefit HCEs — for example, pairing rich owner allocations with token benefits funneled through short-service or low-pay NHCEs. Keep groups broad, business-based (owners, managers, staff), and stable year to year.
Keep the Books Clean: Tracking Cross-Tested Contributions
A cross-tested plan generates bookkeeping chores a plain 401(k) does not. Employer contributions must be recorded per participant and reconciled against both payroll records and the TPA's annual allocation report — discrepancies between what payroll shows and what the recordkeeper received are a classic audit finding. Contributions are deductible for the tax year if deposited by the return's due date including extensions, so calendar the deadline alongside your business return, and book the accrual in the correct year even when cash goes out months later. Forfeitures from unvested departures need their own tracking: applied against future employer contributions or reallocated per the plan document, never pocketed as a windfall. If you run your ledger in plain text, these per-participant schedules are a natural fit for version-controlled accounting — see the Beancount documentation for how to structure employer-contribution postings, and the Fava dashboard to visualize benefit costs against payroll over time.
Simplify Your Financial Management
As you redesign your retirement plan to capture the full $72,000 per-person limit, maintaining clear financial records for contributions, deductions, and testing reports is essential. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
