Cross-Tested Plans

A Cross-Tested Plan is a type of Profit Sharing Plan, 401(k) Plan, or Money Purchase Pension Plan that skews the employer contribution in favor of  the older, higher paid employees.

Advantages

  • If the demographics are right, the plan may provide contributions equal to  the full annual addition limit of $49,000 ($54,500 with catch-up deferrals) to the key employees at a cost of only 5% to non-key employees.
  • Provides the ability to create multiple benefit levels.
  • Flexible and discretionary contributions.

Cross-Tested Plans are Ideal for ...

  • Employers who are older than some employees.
  • Employers desiring larger contributions for themselves and possibly other key employees.
  • Employers desiring flexible contributions

Disadvantages

  • Requires a volume submitter or individually designed plan document.
  • Additional administrative cost

Example

Following is an example of a 401(k) Cross-Tested Plan with a non-elective Safe Harbor contribution. Owner 1's deferral includes the over age 50 catch-up deferral.  The objective of this plan design is to maximize the owner and spouse while minimizing the amount required to the staff.

 

How Complicated are Cross-Tested Plans?

Being subject to rigorous code testing makes Cross-Tested Plans one of the most complex of all.  Without the proper administrative services, a Cross-Tested Plan can turn into a nightmare for the plan sponsor. An integral part of the complexities of a Cross-Tested Plan is in the plan design.   However, if the proper care is taken during the plan design process, Cross-Tested Plans are sure to meet the objectives of the plan sponsor.

Your plan will run smoothly and efficiently if it receives the careful and consistent attention of experienced plan administrators, with advanced computer support systems, working closely with your office staff. Our services include all functions necessary for the smooth operation of your plan, including Plan Design, Documentation, Employee Communication, and Complete Administration.

We have the expertise to determine if this type of Plan is for you!

  Age Wages 401(k) Deferrals Company Contrib. Total Employer Contrib. Percent of Company Contrib. Percent of Wages
Owner 1 55 245,000 22,000 32,500 54,500 49.77% 22.24%
Owner 2 48 245,000 16,500 32,500 49,000 44.75% 20.00%
Subtotal   490,000 38,500 65,000 103,500 94.52%  
               
Staff 1 22 40,000 2,800 2,000 2,000 1.83% 5.00%
Staff 2 67 30,000 1,500 1,500 1,500 1.37% 5.00%
Staff 3 39 20,000 600 1,000 1,000 0.92% 5.00%
Staff 4 51 15,000 0 750 750 0.68% 5.00%
Staff 5 33 15,000 0 750 750 0.68% 5.00%
Subtotal   120,000 4,900 6,000 6,000 5.48%  
               
Grand Total   610,000 43,400 71,000 109,500 100.00%