What is a cross-tested plan? When should a cross-tested plan be used and who does it benefit? Cross-tested plans, also referred to as New Comparability or Tiered Plans, are a powerful retirement planning tool for small businesses and allow more flexibility than a traditional 401(k).
Cross-tested plans allow different levels of employer contributions to be given to different classes of employees.
For example, a doctor's office may have one class for doctors and one class for staff members, thus allowing different levels of contributions to be given to each group.
It is also possible to have each employee be in their own class so that benefits can vary by person.
Although the benefits may differ, these plans are designed to pass IRS non-discrimination testing.
A trusted financial advisor can run scenarios, provide more information and help determine if a cross-tested plan is right for you.
Who a Cross-Tested Plan Benefits and When To Consider One: These plans are designed to benefit older, more highly compensated employees.
Contributions are calculated based on compensation and length of time to retirement.
A cross-tested plan is generally used when business owners want to maximize their benefit and have a shorter time span until retirement than most of their employees.
Employer contributions are also discretionary, which means the business is not obligated to make a contribution in leaner years.
Unlike a Safe Harbor plan, a vesting schedule can be used and an employer can require an employee to work a minimum amount of hours or be employed on the last day of the plan year in order to receive contributions.
For example, under a pro-rata allocation method, an employer would need to give each employee the same pro-rata contribution, such as 20% of eligible compensation.
Under the cross-tested method, the owner may keep a 20% contribution but provide employees with a lower amount, such as 5%.
This reduces the total dollar amount of the employer contribution but also directs a larger portion of the total to the owners.
Everyone in the plan still receives a benefit and the plan will pass non-discrimination testing without issue.
Cross-tested plans allow different levels of employer contributions to be given to different classes of employees.
For example, a doctor's office may have one class for doctors and one class for staff members, thus allowing different levels of contributions to be given to each group.
It is also possible to have each employee be in their own class so that benefits can vary by person.
Although the benefits may differ, these plans are designed to pass IRS non-discrimination testing.
A trusted financial advisor can run scenarios, provide more information and help determine if a cross-tested plan is right for you.
Who a Cross-Tested Plan Benefits and When To Consider One: These plans are designed to benefit older, more highly compensated employees.
Contributions are calculated based on compensation and length of time to retirement.
A cross-tested plan is generally used when business owners want to maximize their benefit and have a shorter time span until retirement than most of their employees.
Employer contributions are also discretionary, which means the business is not obligated to make a contribution in leaner years.
Unlike a Safe Harbor plan, a vesting schedule can be used and an employer can require an employee to work a minimum amount of hours or be employed on the last day of the plan year in order to receive contributions.
For example, under a pro-rata allocation method, an employer would need to give each employee the same pro-rata contribution, such as 20% of eligible compensation.
Under the cross-tested method, the owner may keep a 20% contribution but provide employees with a lower amount, such as 5%.
This reduces the total dollar amount of the employer contribution but also directs a larger portion of the total to the owners.
Everyone in the plan still receives a benefit and the plan will pass non-discrimination testing without issue.