Choose the allocation method around the business’s goals, then compare owner dollars, employee dollars and total funding on a consistent basis.
Four ways to divide an employer contribution
| Method | How it works | Useful starting point |
|---|---|---|
| Flat dollar | The same dollar amount per eligible participant | A simple equal-dollar benefit |
| Pro rata | The same percentage of eligible compensation | A uniform percentage-of-pay benefit |
| Age-weighted | A formula reflecting age and compensation | A benefit allocation that varies with age |
| New comparability | Different allocations for permitted groups, subject to testing | Specific owner or employee contribution objectives |
These are descriptions of allocation methods, not interchangeable document elections. The plan must permit the method, and the applicable testing or safe-harbor conditions must be satisfied.
Example: divide the same $30,000 budget
Assume one owner earning $200,000 and two employees each earning $50,000. Here is the arithmetic for two simple formulas; eligibility and all other requirements are assumed to be satisfied.
| Participant | Flat dollar | Pro rata at 10% |
|---|---|---|
| Owner | $10,000 | $20,000 |
| Employee A | $10,000 | $5,000 |
| Employee B | $10,000 | $5,000 |
| Total | $30,000 | $30,000 |
The same employer budget produces a different distribution. The flat-dollar approach puts more of this budget toward staff; pro rata follows each person’s share of compensation.
Where New Comparability enters the discussion
If the owner wants a different result, the provider can model permitted group allocations. That requires the full age and compensation data; it is not responsible to insert a larger owner number and assume the rest will work.
For a concrete comparison, our worked examples show how a $50,000 budget might be divided under pro rata and a proposed new comparability allocation. The tables separate the economic illustration from formal testing.
Same owner target, different employee cost
The most useful comparison often holds the owner contribution constant. Assume a $300,000 owner wants a $45,000 employer contribution and three eligible employees earn $150,000 in total.
| Method | Owner rate | Employee rate | Employee dollars | Total employer funding |
|---|---|---|---|---|
| Pro rata | 15% | 15% | $22,500 | $67,500 |
| New Comparability illustration | 15% | 5% | $7,500 | $52,500 |
The business is asking for the same $45,000 owner contribution in both rows. The economic difference is the employee funding required by the illustrated formula. The 5% row is not a completed compliance test; it is a proposed allocation that still requires census-level testing.
For more scenarios, see the worked New Comparability examples or the business-owner profit-sharing guide.
Choose a comparison that answers your question
- For a budget decision: hold total employer funding constant.
- For an owner savings target: hold the owner contribution constant.
- For different partner objectives: show each partner separately.
- For simplicity: compare the proposed improvement against the administrative complexity it creates.
The best outcome can be the existing formula. A method that produces a small numerical improvement but makes the plan substantially harder to administer may not be worth changing.
If you are new to the topic, start with how 401(k) profit sharing works. If the business already knows its objective, use the calculator to put the target and employee budget side by side.
Explore the next step
Try the free scenario calculator with hypothetical inputs, or compare more allocation examples. The methodology guide explains what the calculator does and does not test.
Sources & further reading
- IRS: choosing a profit-sharing plan
- Treasury Regulation §1.401-1: qualified plan requirements
- Treasury Regulation §1.401(a)(4)-8: cross-testing and the gateway
Educational content updated September 27, 2026. Examples are fictional; they illustrate funding choices and do not constitute final testing or plan-specific advice.