New comparability lets an employer use different profit-sharing percentages for different people or groups, subject to the plan document and annual testing.
How New Comparability fits into profit sharing
A 401(k) plan can include an employer profit-sharing contribution in addition to employee salary deferrals. The employer contribution still needs an allocation formula: how much of the contribution is assigned to each eligible participant.
A traditional pro rata profit-sharing formula generally gives covered participants the same percentage of compensation. New Comparability is another allocation method. It can place people into different allocation groups and assign different employer contribution percentages, if the plan document permits the design and the resulting allocation satisfies the applicable testing rules.
This is employer money going into retirement accounts. It is separate from the amount an employee elects to save from a paycheck. New Comparability is therefore best understood as a profit-sharing allocation strategy inside a qualified retirement plan, not as a separate type of account.
If you are starting with the broader question, read how 401(k) profit sharing works first, then return here for the specialized allocation method.
A simple allocation example
Imagine a 58-year-old business owner earning $300,000, with three younger employees. The owner wants a $45,000 employer contribution. Here is the same owner target under two possible approaches.
| Participant | Compensation | Pro rata | New comparability |
|---|---|---|---|
| Owner, age 58 | $300,000 | 15% / $45,000 | 15% / $45,000 |
| Employee A, age 30 | $60,000 | 15% / $9,000 | 5% / $3,000 |
| Employee B, age 35 | $50,000 | 15% / $7,500 | 5% / $2,500 |
| Employee C, age 40 | $40,000 | 15% / $6,000 | 5% / $2,000 |
| Total | $450,000 | $67,500 | $52,500 |
The owner receives $45,000 either way. The illustrated employee contribution falls from $22,500 to $7,500, reducing total employer funding by $15,000. That is a funding difference, not a $15,000 tax saving.
Illustration assumptions: A standalone defined contribution plan; all people shown are eligible for the illustrated employer contribution; owners and other specifically identified HCEs are highly compensated employees; remaining staff are non-highly compensated employees (NHCEs). Compensation is eligible plan compensation. Employer dollars include any safe harbor nonelective contribution; employee deferrals, catch-ups, matching contributions and fees are excluded unless stated. These are fictional planning examples, not completed nondiscrimination tests. Final allocations may differ.
Why can the percentages be different?
The testing rules allow qualifying plans to compare contributions as equivalent retirement benefits. Younger employees have more years until the testing retirement age, so a smaller contribution today can produce a comparable projected benefit. This is why an older owner with younger staff can be a promising candidate.
Age alone does not determine the result. The full mix of ages, compensation, ownership, eligibility and contribution sources matters. A younger owner or an older employee may change the allocation significantly.
The two checks to understand first
- The gateway: a minimum employer nonelective contribution for NHCEs benefiting in the arrangement. In the common standalone DC design, it is the lesser of 5% or one-third of the highest HCE allocation rate.
- Nondiscrimination: the proposed amounts must also pass the applicable benefit-based comparison. Paying 5% does not automatically allow any owner contribution.
Coverage, annual contribution limits, top-heavy rules and plan provisions still need review. You do not need to calculate every test yourself to understand the proposal; you do need to know what has actually been tested.
When is it worth exploring?
Start with an objective: the same owner contribution at a lower employer cost, more owner funding within a fixed budget, or different amounts for different owners. A stable business with room in its budget and an age difference between target owners and employees is often worth modeling.
If the workforce is similar in age, the budget is small, or the business wants the same percentage for everyone, a simpler allocation may be a better answer. Ask for a comparison that shows owner dollars, employee dollars and total funding on the same basis.
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(a)(4)-8: cross-testing and the gateway
- Treasury Regulation §1.401(a)(4)-2: contributions and rate groups
- 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.