New Comparability Plans Let Older Owners Take the Biggest Share

In a cross-tested plan, the age gap between an owner and their payroll drives how much of the contribution budget the owner can keep.

Plenty of owners assume a company retirement plan has to hand everyone the same percentage, like a group dinner where the bill gets split evenly no matter who ordered the lobster. It doesn't have to.

A cross-tested profit-sharing plan, also called new comparability, judges each contribution by what it should be worth at retirement. An owner in their 50s has fewer years for money to grow, so a larger contribution can pass the same fairness test as a smaller one for a younger employee. Nobody is hiding anything. It's arithmetic about time.

In one provider's worked example, the owners of an 11-employee firm received 51.72% of a $50,000 profit share under new comparability, compared with 28.19% under a plain pro rata split. The useful question for your own firm is who on your payroll sits closest to retirement, and how far behind them everyone else is.

The IRS stacks more room on top for older owners in 2026: an $8,000 catch-up from age 50, rising to $11,250 at ages 60 to 63 where the plan allows it. One retirement plan specialist on a small-business podcast ranks the tax deduction as an owner's first reason for a plan and building wealth toward a sale as the second. Both reasons point the same way. Neither tells you the price, and the price sits in one rule about what your staff must receive first.

How can an older owner legally get a bigger contribution rate?

Under Treasury's cross-testing rules, an owner in their 50s can receive a far higher contribution rate than younger staff, because each contribution is judged by its projected value at retirement.

Three questions decide whether the design is even worth pricing:

1. Are you meaningfully older than most of the people on your payroll?
2. Do you earn meaningfully more than they do?
3. Can the business fund a staff contribution in every year you want one for yourself?

Two yeses and a maybe is enough to keep reading. So why would the IRS accept the lopsided split in the opening example? Because it isn't comparing percentages at all.

Start with the default. A standard profit-sharing formula gives everyone the same percentage of pay, and pro rata designs like that are automatically treated as nondiscriminatory. If I want a big rate for myself, everyone eligible gets the same big rate. Simple, generous, and occasionally ruinous.

New comparability, also called cross-tested profit sharing, splits payroll into groups and gives each group its own rate. Guideline's help-center guide to the formula notes that a plan document can define broad groups or put each participant in a group of one. The test then asks what each deposit should grow into by retirement age, using what the guide calls the equivalent benefit accrual rate: an assumed investment return blended with an age-based actuarial factor. A dollar given to a new hire has decades to compound, while a dollar given to an owner near retirement has a handful of years. So employers "can often make higher contributions to older employees who are closer to retirement," as the guide puts it.

In practice, your birthday is doing most of the work. So the first thing to ask any provider is whether its plan document lets you sit in a group of one.

The common assumption is that anything this tilted toward the owner must be a loophole waiting to be closed. The history points the other way. Starting in February 2000, Treasury and the IRS reviewed these plans because they worried the designs "were not consistent with the basic purpose of the nondiscrimination rules," and Tax Notes' record of the rulemaking describes a typical plan of that era giving highly compensated employees 18 or 20% of pay while everyone else got 3%. The final regulations, T.D. 8954, kept cross-testing alive for plan years beginning on or after January 1, 2002. Treasury's fix was not a ban. It was a floor for staff.

At Modern Wealth, our focus is business owners and exit and value-maturity planning, so I add one variable before modeling anything: how many more years you expect to run payroll before you sell. If you're the only person on payroll, none of this applies, and our comparison of a SEP-IRA versus a solo 401(k) is the better read.

Line up the 5 sources behind this section, from a 2001 Treasury rule to provider guides updated this year, and the mechanism never changes: time to retirement does the heavy lifting, not a clever accountant. Before you fall for your own rate, ask what every eligible employee has to receive for that rate to stand.

What does the gateway minimum cost the owner?

Each eligible rank-and-file employee must get the lesser of one-third of the highest rate any highly compensated employee receives or 5% of pay, which makes staff cost a budget line.

That's the trade. Whether it's a good one depends on your tax bill, your cash flow and your exit date all at once, which is why Modern Wealth looks at financial planning, wealth management and business advisory together rather than one at a time.

The "lesser of" wording matters more than it looks. Guideline's walkthrough of a 10-employee firm that already made a 3% safe harbor nonelective contribution shows how it plays out: the owners' total nonelective rate came to 13.33%, which set the gateway at 4.45%. Because the safe harbor money counts toward the floor, staff needed only another 1.45% of pay on top of what they were already getting. Ask your administrator to show that floor as a dollar figure for each eligible employee, not just a percentage.

Two details trip owners up, and both are about what counts:

• A safe harbor nonelective contribution counts toward the gateway. A safe harbor match does not, so a matching plan still owes the full floor.
• In a nonelective safe harbor plan, anyone who received that contribution during the year must also get the gateway amount, even someone who has since left.

Now scale it up. In one plan administrator's illustration, two owners each paid $360,000 targeted $47,500 apiece in employer profit sharing, alongside 20 staff earning $1,100,000 combined. A uniform pro rata formula would have sent $145,139 to staff to get the owners there. A new comparability design with a simplified 5% staff allocation sent $55,000. Ask for that same two-formula comparison on your own census, because a provider's example firm is not your firm.

None of this makes staff contributions small. The floor is a percentage, not a dollar amount, so it grows every time you give your team a raise. That distinction is the whole point, because a cost you can see in March is far less stressful than a testing failure you discover in the spring of the following year.

There's a sharper way to judge whether the floor is worth paying. In a 2020 episode of the 20/20 Money podcast, the host framed profit sharing as tax arbitrage: a practice owner paying 32% in taxes comes out ahead if the plan is designed so only 20 cents of each contributed dollar goes to staff, because 20 is less than 32. The reverse can happen too. The same episode was candid about the drawback: bigger benefits for the favored group require additional employer contributions for rank-and-file staff.

So the question I'd ask isn't "how much can I put in?" It's "how many cents of each dollar leave the building, and is that number below my tax rate?"

Two things can move that number after the plan is running. A workforce that swings in size or age changes the funding cost from year to year, and the design brings more complexity and higher administrative costs than a plain formula. Staff contributions aren't pure cost, either. A team that stays is worth something at sale time, since buyers pay less when a company can't run without you. Which raises the timing question: when in your exit runway should this plan switch on?

Is a cross-tested plan right for your business, or is a SIMPLE IRA enough?

Cross-testing fits when you're older than most of your staff, profits are steady, and you want deductible savings before an exit, weighed by a fee-only fiduciary rather than a plan seller.

Conventional wisdom says to start with the most powerful plan you can afford. I'd push back. Power you can't fund every year is just expensive paperwork.

Charles Reichelt, a retirement plan advisor interviewed on the Empowering Healthy Business podcast, offers a car analogy I find useful: a SIMPLE IRA is a Civic, a 401(k) is an Accord, a 401(k) with profit sharing is a BMW, and a cash balance plan is a Porsche. The Civic lets an owner set aside "$16,000 to $17,000." Adding profit sharing to a 401(k), he said, lets an owner save "in many cases, up to $70,000 to $80,000 a year inside one plan." He also called the SIMPLE "usually a great solution" for owners who want "no fuss, no muss" and don't need big deductions.

Nobody needs a BMW to buy groceries. Some people still want one, and that's allowed.

Cross-testing earns a serious look when three things line up: you're clearly older than most of your staff, profits are steady enough to fund the staff floor every year, and the goal is to shelter as much as possible before an exit. Miss one, and the Civic may be the better car.

The exit piece matters more than most owners admit. In a 2025 r/smallbusiness thread about owners' retirement plans, the original poster worried that many owners were "banking on selling their business one day," and one commenter put the owner's 401(k) ceiling that year at "$70k a year" against the employees' "$23,500." Another commenter's approach was blunt: "I pretend like I am getting zero for my business." A third admitted an accountant had warned, "don't count on selling your business to retire, you need to save now," and that the advice went unheeded.

The sale is a bonus. The plan is the floor.

Modern Wealth is an independent, fee-only fiduciary with no product commissions, so I don't earn a dime more if you pick the BMW. That matters here, because the honest answer is sometimes the SIMPLE IRA, and occasionally it's to do absolutely nothing until profits settle down. Our work spans financial planning, wealth management, and business advisory, which is where a plan decision belongs: next to your tax picture and your exit timeline. Plan choices ripple into other moves, too, including whether the pro-rata rule ruins a backdoor Roth you were counting on.

So the first thing I'd ask a plan administrator for isn't a brochure. It's the gateway cost in dollars for your actual payroll, sitting next to what a plain pro rata formula would cost for the same owner contribution.

What should an owner in their 50s do before choosing a plan?

Get the numbers run for your actual payroll before choosing a plan, because the gap between your age and your staff's ages decides how much of the pot you keep.

In 2022, an S-corp owner on Reddit's r/fatFIRE forum described putting $58K, or 20% of a $290K W-2, into a SEP IRA each year. With staff now a couple of years in, the owner believed the same 20% would have to go to every employee. For a SEP, that's how it works. Cross-testing changes the question.

Here's where I land. Before you commit, ask the administrator to run the test on last year's payroll, so you see whether the design passes before any real money goes in. Surprises are lovely at birthday parties. Less so in plan testing.

A commenter in that same thread named the inputs that drive the design: what you want to set aside, business income, your age, how long employees have stayed and how old they are. A third-party administrator runs those numbers with an actuary, which is exactly where your payroll report should go next.

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