New comparability (sometimes called “cross-tested”) 401(k) plans are a type of profit‐sharing 401(k) plan that lets employers allocate different contribution rates to different groups of employees. In plain terms, instead of giving everyone the same percentage of pay, a new comparability plan can give owners or older/highly‐paid employees a larger share of the employer’s profit‐sharing contribution. For example, a firm might put partners (in one “class”) on a 20% contribution schedule and regular employees (another class) on a 5%. This tiered approach is allowed so long as the plan passes IRS nondiscrimination testing. In practice, employers project each class’s contributions to a retirement‐age benefit and test that overall the highly‐paid workers are not over‐favored compared to rank‑and‑file.
New comparability plans are qualified defined-contribution profit-sharing plans. They are funded only by employer contributions (not by employee elective deferrals) and can be standalone or added on top of a 401(k).
Employers divide employees into two or more groups (often by job category, ownership, age or other factors). Each group has its own allocation rate. Many plans even put each owner or executive in a group by themselves to maximize.
Because the IRS requires fairness (nondiscrimination) in retirement benefits, new comparability plans use cross-testing. Instead of looking at each year’s contribution dollar-for-dollar, cross-testing projects the current contributions to an equivalent retirement benefit (typically an annuity starting at normal retirement age). Younger employees have more time to grow their savings, so an equal benefit requires smaller contributions for them. Using actuarial assumptions, the plan tests that no class of highly compensated employees (HCEs) would end up with a much larger benefit than the NHCEs (non‑highly compensated employees) on.
This design makes new comparability plans very attractive for small businesses where owners or senior executives want to save as much as possible. By “front‐loading” contributions into certain groups (e.g. older owners), the plan can maximize tax-deductible contributions without violating the rules – assuming it passes the required tests.
Historical Background and Context
The concept of allocating retirement contributions by age or group dates back decades, originally in defined-benefit plans. In the late 1990s and early 2000s, the IRS formally recognized this “cross-testing” approach for defined-contribution plans. In 2001 the IRS proposed regulations for “new comparability” plans, and final rules followed in the early 2000s. These rules let such plans pass nondiscrimination testing under certain “gateway”. The term new comparability came to distinguish these plans from standard profit-sharing designs, and it reflects the IRS requirement that contributions be comparable on a benefit basis, not necessarily on contribution amounts.
In practice, new comparability plans became popular among small professional firms (law, accounting, medical practices, etc.) starting in the 2000s. Industry experts note that they allow sponsors to “divide employees into different groups and project what a current contribution would amount to at retirement age,” letting older or higher‐paid workers receive larger contributions. A PlanAdviser article in 2017 observed that such plans are “popular among small, professional companies,” since they can reward key employees (e.g. partners) with higher contributions while still keeping the plan.
Key regulatory milestones include:
IRS cross-testing regulations (later codified under IRC §401(a)(4) and §401(a)(26)): these allow plans to compare benefits rather than contributions, subject to requirements like minimum “gateway” contributions.
Minimum Gateway Rule (Reg. §1.401(a)(4)‑8): Requires that every non‑highly compensated employee (NHCE) get at least a certain minimum allocation (either 5% of pay or one-third of the highest HCE rate). Meeting this gateway lets the plan use cross-testing for nondiscrimination.
Over time, new comparability plans have been embraced especially by businesses with disparate ages or pay levels. If a firm has older owners and younger staff, cross-testing lets the contributions reflect those differences. But these plans are also complex, so they’re typically implemented with professional help (TPAs or consultants).
Legal and Regulatory Basis
New comparability plans are subject to the same fundamental tax‐qualification rules as other 401(k) plans, with some special provisions:
Nondiscrimination (IRC §401(a)(4)): The plan must not discriminate in favor of HCEs. Under new comparability, this is tested by cross-testing on an equivalent benefit basis (Reg. §1.401(a)(4)‑8). In effect, we convert each annual allocation to an equivalent retirement benefit (using actuarial factors) and ensure HCE benefit rates are not too high relative to NHCEs. In practice, if the HCEs’ projected retirement benefit would exceed the NHCEs’ by more than 25%, the plan may fail.
Minimum Allocation Gateway: To qualify for cross-testing, the plan must first clear the gateway. Either all NHCEs must receive at least 5% of pay, or each NHCE’s rate must be at least one-third of the highest HCE’s rate, whichever is less. For example, if the top HCE rate is 15%, the NHCEs must get at least 5% (because 5% is one-third of 15%). If an HCE gets 12%, then one-third is 4%, so NHCEs need at least 4%. These rules ensure the plan has a basic level of benefits for rank-and-file employees.
Other nondiscrimination tests: New comparability plans must still satisfy overall coverage tests (IRC §410(b)) and, if the 401(k) deferral feature is used, the ADP/ACP tests under §401(k) and §401(m). (Often plans will use a separate safe-harbor 401(k) or QNEC to auto-pass the ADP/ACP tests.)
Annual IRS filings: Like all qualified plans, a new comparability 401(k) must have a written plan document and file an annual Form 5500 (or 5500-SF for small plans) with the DOL/IRS. Form 5500 instructions even have a specific code (“new comparability plan”) for such allocations. The plan’s adoption agreement must clearly describe the allocation method (often called “grouping method” or “cross-tested profit sharing”).
Contribution Limits: The total employer contribution (including new comparability profit-sharing plus any matching) cannot exceed IRS limits ($66,000 for 2023, or $73,500 with catch-up). These are the same §415 limits that apply to all DC plans.
In summary, IRC §§401(a)(4) and (a)(26) and Treasury Regs §§1.401(a)(4)‑8 govern new comparability plans. The regulations essentially allow benefit-based (cross) testing if the allocation gateway is. In common language: the law lets you give different contributions to different classes so long as the end benefits are still “fair enough.”
How New Comparability Plans Work
New comparability plans involve several key steps in design and testing. Below is an outline of the process, using simple terms:
Identify contribution goals and classes. The employer decides which employees to favor (e.g. older owners) and which to give smaller allocations. Common groups are: owners/executives, managers, and rank-and-file staff. Many plans simply put each owner or officer in his/her own class to maximize flexibility.
Draft the plan document. The written plan (often through a prototype or volume‑submit adoption agreement) must specify that “cross-testing” (or “grouping method”/“new comparability”) is used. It should define the classes objectively (by job category, or by each employee) and describe the method for allocating each year’s profit-sharing.
Determine annual contribution amounts. Each year the employer chooses how much to deposit to the plan (a discretionary profit-sharing amount). The maximum total contribution is 25% of combined eligible pay (100% of each individual’s pay weighted by vesting considerations). The employer then decides how to split that total among the classes. For instance, the plan might say: “Owners get 20% of pay, other employees get 5%,” up to the contribution limit.
Apply the Gateway Test. Before doing cross-testing, ensure every NHCE’s allocation meets the “minimum gateway.” Compute each class’s basic allocation rate (i.e. percentage of pay). The lowest NHCE rate must be at least the lesser of (5% of comp) or (1/3 of the highest HCE rate). If this is not met, the employer must bump up contributions to NHCEs (or lower HCE allocations) to satisfy the gateway.
Perform cross-testing. Convert each class’s contribution allocation into a projected retirement benefit (usually a single life annuity at NRA). This involves actuarial math (using assumptions like age, interest rate, mortality). In effect, the plan asks “if we took this year’s contribution and converted it to a pension, how much would each participant get per year of retirement?” Because younger NHCEs have more years to compound, they usually get similar or higher annuities from smaller contributions. The IRS treats this as a benefit test under Reg. §1.401(a)(4)‑8: it checks that the average HCE benefit is not disproportionately higher than the NHCE average. If the HCE “benefit ratio” is more than 125% of the NHCE ratio, adjustments are needed.
Adjust and repeat if needed. If the cross-test fails (for example, because contributions favor HCEs too much even after the gateway), the plan sponsor has options: they can increase contributions for the NHCE group, or reduce allocations for the HCEs (or do both) until the test passes. This might require iterating the calculation or setting different allocations at the next contribution cycle.
File Form 5500 and keep records. Each year, the plan must be reported on Form 5500 (including total contributions by allocation method). The plan document and summary plan description must reflect the adopted allocation formulas. Payroll and census records should clearly track each participant’s compensation, hours and group classification. A trusted TPA or actuary usually handles the calculations and ensures all IRS requirements are met.
Example: Consider a small medical practice with one physician-owner and four staff. The employer deposits a profit-sharing contribution and allocates it as follows: the owner’s class gets 20% of the owner’s salary, while the class for the four employees gets 5% of each employee’s salary. Suppose this satisfies the 5% gateway for NHCEs (yes, 5%≥5%). Now we cross-test: convert 20% for a 50-year-old doctor and 5% for each 30-year-old employee into retirement benefits at age 65. Because the owner is older, his 20% contribution yields a similar or slightly larger pension compared to the employees’ 5%. The plan then checks the HCEs’ average vs NHCEs’ average. If the disparity is within legal limits (125%), the plan passes. This lets the owner defer much more tax on his salary than a flat-percentage plan would allow.
Pros and Cons
New comparability plans have distinct advantages and disadvantages, which can vary by perspective:
Pros for Owners/Highly‐Paid Employees: These plans maximize retirement savings for owners and key staff. By giving them a higher percentage, they can reach the IRS contribution limits (up to $66K in 2023, or $73.5K with catch-up) even if that would fail standard nondiscrimination tests. New comparability takes into account age, so older owners can get a much bigger immediate allocation without technically “breaking the rules”. It also allows flexibility – if profits are high one year, the employer can make a big contribution, then scale back in lean years, without a fixed required match (unlike safe-harbor 401(k) plans).
Pros for the Company: For small businesses, it provides an attractive benefit to recruit and retain owners/executives. It can be more cost-effective in good years (since contributions are discretionary and can be adjusted annually). It also allows one plan to cover everyone (avoiding the complexity of a separate defined-benefit plan for owners). New comparability plans are permitted for employers of any size, so even very small companies can adopt them.
Pros for Lower‐Paid Employees: Even though they get a smaller rate, NHCEs do receive a guaranteed base allocation. The plan must give them at least the gateway minimum (often 5% of pay) so rank-and-file still get a solid employer contribution each year. This can be more generous than zero contributions in a top-heavy plan. Employees of a company with such a plan still benefit from any safe-harbor or matching features the employer might add.
Cons for Owners/HCEs: The plan forces contributions to NHCEs via the gateway and testing. Owners may have to give up some discretionary funding (or take less) if tests fail. Also, the complexity means higher administrative costs. Specialists (TPAs or actuaries) are needed to set it up and run the tests each year. Employers lose some control – once a contribution is allocated, you can’t “claw it back” from NHCEs if the plan later fails a test.
Cons for Non‐Highly‐Paid Employees: Non‑owners receive a smaller slice of the pie compared to a flat-profit-sharing plan. If an owner’s rate is very high, NHCE contributions can seem modest (sometimes just the 5% floor). This can feel unfair, even though it technically meets IRS rules. Employees with many years of service or who are slightly older may feel they deserved more, since cross-testing cannot reward them as much as it does owners (by design).
General Drawbacks: New comparability plans are complex. The annual testing is more involved than for a simple profit-sharing or safe-harbor 401(k). As one plan document warns: “the grouping method (also known as cross-testing or new comparability) may require complex annual testing and should be selected only with expert advice”. Changes in workforce (hires, terminations, compensation changes) can suddenly make a plan fail tests, requiring mid-year strategy adjustments. There are also higher fees (TPA/actuarial fees) than for a basic plan.
In short, new comparability plans favor business owners and key executives (they get higher contributions), while still giving employees a safety net. They work best in companies with a significant gap in age or pay between owners and staff. If everyone is paid about the same or if the workforce changes a lot each year, the plan can become difficult to maintain.
Step-by-Step: Setting Up a New Comparability Plan
Consult a Plan Specialist (TPA). Because of the complexity, start by engaging a knowledgeable third-party administrator or retirement consultant. They will help design the plan, run models, and ensure compliance. (As one advisor put it, cross-tested plans are “a method advisers might consider for smaller plan sponsors with populations of older, higher-paid employees”.)
Choose or Amend a Plan Document. Adopt (or amend) a 401(k) plan that allows profit-sharing allocations by “group”. On an IRS Adoption Agreement, this is often called the “grouping method”. Specify the classes clearly (e.g. “Owners in Class A; all other participants in Class B”). The plan should state how annual profit-sharing contributions are allocated by class. (Many pre-approved document providers include a new-comparability option.)
Define Allocation Rules. Work with your TPA to set the maximum contribution rates for each class. Remember the IRS limit (25% of compensation for employers, subject to §415 limits). For example, you might decide: “Class A (owners) 20% of pay, Class B (others) 5% of pay.” Often these percentages are “soft” targets – the actual contribution is discretionary each year, but should follow the plan’s formula to pass testing
Ensure Gateway Compliance. Verify that the chosen rates meet the gateway: every NHCE’s rate must be ≥5% of pay or ≥1/3 of the top HCE rate. For example, if the highest class rate is 15%, NHCEs need at least 5% (since 5% is one-third of 15%). If your planned rates don’t meet this, adjust them now (e.g. give NHCEs at least 5%).
Coordinate Payroll and Recordkeeping. Make sure payroll can distinguish the employee classes and apply the correct contribution rate for each. Keep good records of each participant’s age, service, and compensation. Maintain a census of every eligible employee (including those terminated mid-year) and their allocation group. These records feed into the compliance testing.
Annually Decide Contributions. Each year (or plan year), the employer decides how much total profit-sharing to contribute. Then that total is split among the classes per the plan’s formula. For example: “We are contributing 25% of each owner’s pay and 5% of each staff’s pay this year.” Calculate the dollar amounts and deposit them to participants’ accounts.
Run Nondiscrimination Tests. The TPA will perform the formal compliance check. First, verify the gateway (5%/1/3 rule) is met. Next, do the cross-test: project each class’s allocation to a benefit at retirement age and compare HCEs vs NHCEs If the plan fails (HCEs get too large a benefit ratio), the TPA will recommend corrective options: usually increasing NHCE contributions or lowering HCE contributions.
Adjust If Necessary. If the testing shows a violation, make mid-course corrections. For example, you could add a Qualified Non-Elective Contribution (QNEC) for NHCEs, or reduce the owner’s allocation. In practice, companies often set contributions conservatively so tests pass with room to spare, then boost NHCE rates only if needed.
File Required Forms. By the annual deadline (usually the end of the 7th month after year-end), file Form 5500 (or 5500-SF). The DOL instructions specifically list “new comparability” under Profit Sharing Plan features. Provide any necessary plan amendment (if the plan document was changed midyear) and ensure the Summary Plan Description is updated.
Continual Review. Each year, reassess. Large changes in staff (hires, retirements) or compensation levels can affect testing. Keep your advisor informed of any major changes. The TPA will likely want to run projections early in the year if contributions will be made, to ensure everything lines up.
Use Cases and Real-World Scenarios
New comparability plans are most useful when an employer wants to give business owners or top executives a bigger retirement benefit than rank-and-file employees. Common situations include:
Professional practices (lawyers, doctors, accountants): Firms where partners are older and earn much more than staff often adopt new comparability plans. A PlanAdviser article notes these “small, professional companies” favor such plans to reward senior members For example, a law firm might give its senior partner a 20% profit-sharing allocation and associates 5%, projecting to larger pension for the partner at retirement.
Family businesses or closely-held companies: Owners who want to catch up on retirement savings use new comparability to accelerate their contributions. If an owner is 55 and the staff are mostly 30s, the owner’s contributions can go much higher while still passing benefit testing.
Companies with skewed age profiles: If a significant portion of NHCEs are very young, the employer can justify a high allocation to older workers. For instance, a tech startup with a senior founder may use new comparability to reflect the founder’s age.
Comparing to other plan types: A small business might otherwise consider a defined-benefit cash-balance plan to get large contributions for owners. New comparability can be an alternative since it’s just a DC plan (simpler funding rules). It also allows stopping contributions when cash is tight (a defined benefit typically requires a set annual contribution).
Flexible profit years: In a good year, a new comparability 401(k) let you make a big profit-sharing contribution and allocate it very favorably to owners. In a lean year, you can cut back or skip the profit-sharing without violating any fixed funding rules. This “on‑off” flexibility is harder with traditional profit-sharing or defined benefit designs.
Example Scenario: A dental practice has two dentist-owners (ages 52 and 48) and three hygienists (ages 30–40). The practice sets a new comparability plan so that each dentist’s class gets a 25% contribution, while the hygienists’ class gets 5%. The plan easily passes the 5% gateway and, after cross-testing, shows the dentists’ projected retirement pensions are still reasonably comparable to the hygienists’ (thanks to age differences). As a result, the owners maximize their tax-deferred savings, while the hygienists still get a solid 5% employer contribution. This would not be possible with a standard “flat” profit-sharing plan.
Practical Implementation Advice
Use a Reputable TPA or Actuarial Firm. Because of the math involved, it’s wise to work with an experienced retirement plan administrator. They will handle the census analysis, benefit projections, and IRS compliance. “New comparability” should be a familiar tool for your advisor. As one provider cautions, the grouping method “may require complex annual testing”, so don’t try this without expert help.
Coordinate with Payroll/Recordkeeper. Notify your payroll and recordkeeping vendors of the plan’s design. You’ll need to have each employee marked by the correct class so that allocations are computed properly. If your recordkeeper (e.g. Vanguard, Fidelity) allows custom contribution formulas, ensure they are set up according to the plan. Any change in class (e.g. someone promoted to manager class) must be documented and usually needs plan amendment.
Plan Document & Amendments. The plan document must explicitly authorize new comparability/cross-testing. If the company starts as a flat plan and later switches to new comparability, be sure to amend by the end of the prior plan year (generally by Dec. 31). The adoption agreement guide notes that the grouping method should be plan-defined, not discretionary at year-end.
Form 5500 Filing. On the Form 5500, check the profit-sharing plan box. In the Appendix A (plan characteristics), you will classify it as a “New comparability” profit-sharing plan. The Form 5500 instructions confirm that profit-sharing and 401(k) plans must file annually. Keep copies of all contributions schedules and testing results in your plan file.
Recordkeeping Tips. Maintain an accurate census of all participants (including any who terminated or became ineligible mid-year). Track ages, compensation, and hours of service exactly as required by Code §§410(a) and 414(s). If you use a one-year break-in-service rule or minimum-hours rule for eligibility, document it clearly (because those choices can affect coverage testing as well).
Coordinating with Other Plan Features. If you also have a 401(k) salary-deferral component, remember that separate ADP/ACP tests apply to that part (or use safe harbor contributions to satisfy them). Also note that 401(k) elective deferrals do not count in new comparability testing, whereas employer nonelective contributions do. If the plan is top-heavy, the owners might have to pay a minimum to all NHCEs anyway, but often new comparability plans either meet safe-harbor 401(k) rules (avoiding ACP tests) or provide adequate NHCE allocations to avoid top-heavy penalties.
Vendor Coordination. If you use a bundled provider or trust (e.g. ADP, John Hancock, etc.), confirm they support new comparability designs. Some 401(k) platforms charge extra for custom designs. Your provider should perform the annual benefit testing (or provide raw data for your TPA to do so). Regularly review statements to ensure contributions are being allocated per the plan’s formula.
IRS Notices/Compliance. Unlike safe harbor 401(k) plans, new comparability 401(k)s do not require annual employee notices. However, if you switch midyear or adopt a different plan year start, be mindful of the timing. Always keep the plan’s Summary Plan Description (SPD) up to date.
Key IRS References: The IRS website has limited plain-language guidance on these plans, but the regulations are under IRC §401(a)(4). For official reading, see the IRS 5500 instructions (definition of allocation types) and IRS published guidance on cross-testing (Rev. Rul. 99-51 and Regs. §1.401(a)(4)-8). One practical guide from IRS (Local Advisor Manual) explicitly states the gateway: “Each eligible NHCE must have an allocation rate… not less than the lesser of 5%, or one-third of the allocation rate of the HCE with the highest allocation rate.”
In summary, coordination and clear documentation are key. Work closely with your CPA/TPA to choose and implement the plan design. Track employee data carefully. Run the tests early enough to make allocation decisions. And remember: new comparability can unlock much higher contributions for owners, but it must be done by the book to keep the plan qualified.