Cross-Testing is a term used by the IRS to describe a retirement plan (usually a profit sharing plan) which has different contribution percentages for different groups of employees. For example, the business owners may want to contribute 25% of compensation for themselves, but only 5% of compensation for each of the other employees.
Because retirement plans cannot discriminate against Non-Highly-Compensated Employees, plans must prove non-discrimination by "testing" benefits "across" the various groups. This can sometimes allow the business owners (or favored employee groups) to have larger contributions than the rest of the employees.
In general, Cross-Testing works if the owner is older than the average age of the other employees. This is because they are closer to retirement age and therefore have fewer years to accumulate for retirement. With fewer years to accumulate, their individual contribution must be higher than the other employees just to get the same level of benefits at retirement age. In some cases we can even get a Cross-Tested plan to work if the average employee is older than the business owner.
Contact TRA today for a free consultation to learn more about the advantages of a Cross Tested plan.
To learn about the Cross Tested retirement plans, complete the form below.