A contribution percentage only becomes meaningful when you know which compensation it applies to.
Which pay is the percentage based on?
The document defines compensation used to allocate contributions. Testing may require a different measure or additional checks. Some definitions include or exclude particular pay items, and the treatment can vary by contribution source or participation period.
Keep the underlying payroll data intact. If the plan excludes a pay item, document the adjustment rather than silently changing gross compensation in the census.
Example: a bonus changes the allocation
| Pay item | Amount |
|---|---|
| Regular wages | $60,000 |
| Bonus | $10,000 |
| Compensation if both are included | $70,000 |
| 5% allocation on $70,000 | $3,500 |
| 5% allocation on $60,000 | $3,000 |
The $500 difference comes from the compensation base, not a different contribution rate. A bonus exclusion must be permitted by the document and satisfy applicable compensation rules; it cannot be chosen just to reduce this year’s cost.
S corporation owners and self-employed owners differ
Suppose an S corporation owner has $100,000 of eligible W-2 compensation and $200,000 of shareholder distributions. A 15% employer allocation on the W-2 compensation is $15,000, not $45,000. Shareholder distributions do not supply retirement-plan compensation.
For a partner or sole proprietor, the provider and accountant calculate earned income under the self-employment rules. It is not always the raw K-1 amount, cash distribution, or Schedule C profit. Adjustments can include the deductible portion of self-employment tax and the owner’s employer contribution.
Cap and reconcile the inputs
For 2026, the annual compensation cap is $360,000 for this purpose. An employee earning more does not automatically get a contribution based on the full uncapped amount. Different limits and compensation definitions also apply to annual additions and deductions.
- Reconcile payroll totals to the source records.
- Identify bonuses, commissions, excluded pay and pre-entry compensation.
- List owner compensation separately by entity type.
- Confirm the same assumptions are used in the proposal and final allocation.
For an actual engagement, ask the provider for its required census format and a written list of compensation adjustments.
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
- Treasury Regulation §1.414(s)-1: compensation definitions
- IRS: S corporation retirement contributions
- IRS: retirement plans for self-employed people
- IRS Notice 2025-67: 2026 retirement plan limits
Educational content updated September 18, 2026. Examples are fictional; they illustrate funding choices and do not constitute final testing or plan-specific advice.