A New Comparability formula (also referred to as a Cross-Tested Formula) is a profit-sharing allocation method that allows employers to provide different contribution percentages to different groups of employees. The formula is tested on multiple factors such as age, ownership, and compensation to ensure there is no discrimination.
This type of formula is most often used when an employer wants to provide higher profit-sharing contributions to certain employees, such as owners or key personnel, while maintaining compliance with IRS rules.
Who This Applies To
This information applies to plan sponsors whose 401(k) plan includes New Comparability as the profit-sharing allocation formula.
How to Determine if Your Plan Uses a New Comparability Formula
You can confirm whether your plan uses a New Comparability formula by checking one of the following locations:
- Plan Provisions in your employer portal
- Log in to your employer dashboard.
- Go to 401(k) Plan in the left navigation.
- Select the Plan Overview section.
- Under the Contributions section, look for Employer Profit Sharing Contribution. If it says “New Comparability” your plan uses this formula.
- Adoption Agreement
- Review your plan’s Adoption Agreement in the Documents section of your account.
- In the Profit Sharing Contribution section, you’ll find the type of formula selected for your plan.
- Contact Ubiquity
- If you’re still unsure, you can contact us to confirm your formula or to request a copy of your plan’s adoption agreement.
When and Why New Comparability Testing Is Required
If your plan has a New Comparability formula, testing is required anytime you fund a profit-sharing contribution even if you choose not to use the tiered or age-weighted contribution structure this formula allows.
This testing ensures your plan’s contributions comply with IRS nondiscrimination rules.
For example:
- Scenario 1: You decide to allocate a flat 5% profit-sharing contribution to all eligible employees. Even though this looks like a standard formula, if your document specifies New Comparability, testing must still be performed.
- Scenario 2: You allocate different profit-sharing percentages by employee group or age band. These tiered allocations must also pass the same nondiscrimination testing to ensure compliance.
Testing ensures that you can demonstrate that your plan is in compliance if your plan is ever subject to an IRS or DOL audit.
When a New Comparability Formula Is Most Useful
New Comparability formulas are particularly effective when:
- Your Highly Compensated Employees (HCEs) are older and closer to retirement than Non-Highly Compensated Employees (NHCEs).
- You have multiple HCEs but not all wish to receive a profit-sharing contribution.
- This is common in partnerships, where each partner decides whether to fund their own share.
- In a standard formula, all eligible employees must receive the same percentage of compensation.
- Under New Comparability, you can exclude certain HCEs (such as partners who choose not to contribute) without affecting compliance.
Requesting a Profit Sharing Calculation
If your plan uses a New Comparability formula and you plan to make a profit-sharing contribution, you must request a calculation from Ubiquity. We provide 3 calculations per plan year, free of charge.
Here’s how to proceed:
- Contact our support team.
- Provide your completed census data and indicate the profit-sharing contribution you’d like to make.
- We will perform the New Comparability calculation to ensure your plan passes required testing before finalizing contributions.
This step protects your plan from potential IRS issues if your plan is audited.
New Comparability Key Takeaways
- Testing is required for any plan with a New Comparability formula, regardless of whether you use tiered or flat contributions.
- You can confirm your plan’s formula in your Plan Provisions or Adoption Agreement.
- Contact Ubiquity to request a New Comparability calculation for your plan.
Need Assistance?
If you need assistance, please contact us.