Profit-Sharing Plans in 2026 — Part 5 of Our Retirement Plan Series
Parts 1 through 4 of this series covered the 401(k) building blocks and the SEP-IRA. A profit-sharing plan is not a separate account type — it is a discretionary employer contribution feature that can be layered onto a 401(k), funded after the year ends, using one of several IRS-approved formulas. For a business owner, the formula chosen can mean a dramatically different outcome for how much of that contribution actually lands in the owner's own account.
What a Profit-Sharing Contribution Actually Is
A profit-sharing contribution is a discretionary, employer-funded addition to a qualified retirement plan, typically decided and deposited after the plan year closes, based on the business's actual results. Per federal regulations, the plan document must specify a definite, predetermined contribution formula for how the contribution is allocated among participants — the employer cannot simply decide case by case each year who gets what. For 2026, total employer and employee contributions combined are capped at the lesser of 100% of compensation or $72,000 under the same Section 415(c) limit discussed in Part 2 of this series.
The Formula Options
The simplest approach, a pro-rata contribution formula, gives every eligible employee the same percentage of their compensation — straightforward, but it means an owner cannot receive a larger percentage than staff. A permitted disparity formula integrates with Social Security taxable wage limits, allowing a modestly larger percentage on compensation above that threshold. An age-weighted contribution formula ties the allocation to each participant's age, giving older participants — often the owner — a larger share on the theory that they have fewer years remaining to accumulate retirement savings. The most flexible option, new comparability, allows the plan to divide employees into distinct groups, often by ownership or job classification, with a different contribution percentage for each group entirely.
New Comparability — Where the Real Leverage Sits
A new comparability contribution formula — also called a cross-tested formula because it relies on cross-tested projections — is the design most likely to let an owner receive a meaningfully larger contribution than staff — but it comes with a real compliance requirement. Because the IRS prohibits a plan from favoring highly compensated employees, defined by ownership or compensation level, under nondiscrimination rules, a new comparability allocation must pass a general nondiscrimination test using each group's equivalent benefit accrual rate, a projection of what today's contribution would be worth as a retirement benefit, rather than simply comparing the dollar amounts contributed under a pro-rata approach. This cross-tested method tends to favor plans where the owner is meaningfully older than the broader workforce, since the same contribution dollar under an age-weighted design produces a smaller projected retirement benefit for a younger employee with more years to grow it — a structural feature the testing accounts for directly.
Contributing the same flat percentage to every employee, including yourself?
A new comparability formula may allow a meaningfully larger contribution for you specifically. Schedule a consultation.
taxwealthconsultant.com | (949) 409-8335
The Discretionary Flexibility
Unlike a safe harbor contribution, discussed in Part 3 of this series, a discretionary profit-sharing contribution can vary from year to year, or be skipped entirely, based on how the business actually performed. This makes profit sharing a genuinely useful lever for a business with fluctuating income — fund it generously in a strong year to capture a larger deduction, and reduce or eliminate it in a leaner one without violating any fixed funding promise the way a defined benefit or cash balance plan would.
Where This Fits in the Series
Profit sharing is typically layered on top of a 401(k) with employee deferrals and often a safe harbor contribution, forming the second tier of a business owner's total contribution capacity. Part 6 of this series covers what happens when even a maximized profit-sharing contribution is not enough — combining a 401(k) profit-sharing plan with a cash balance or defined benefit plan to shelter substantially more.
How Tax Wealth Consultant Approaches Profit-Sharing Design
Tax Wealth Consultant models each formula option against your actual workforce demographics, evaluates whether a new comparability design would pass the required nondiscrimination testing for highly compensated employees given your specific ages and compensation, and helps decide the contribution amount each year based on real business results rather than a fixed commitment. The formula chosen can be the difference between a flat, equal contribution and one substantially weighted toward the highly compensated owner — entirely within IRS rules.
The formula decides who the contribution actually benefits. Choose it deliberately.
Schedule your confidential 30-minute review with Tax Wealth Consultant today.
taxwealthconsultant.com | (949) 409-8335
Tax Wealth Consultant provides tax planning, tax preparation, and wealth advisory services for business owners, professionals, and investors in Irvine, Orange County, and beyond.
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