Also called a new comparability plan, a cross-tested plan is a profit sharing plan that functions in some respects as a target benefit plan (discussed below). That is, contributions are based on the amount needed to accommodate a target retirement income benefit. The intent behind a cross-tested plan is to direct a higher percentage of the employer's contributions to older employees, who have relatively little time in which to accumulate funds to support a target benefit, which in turn requires that a larger share of contribution be allocated to those older employees.
In a cross-tested plan, participants are divided into two or more groups (known as preferred groups and non-preferred groups), with an independent contribution formula for each class. As described in Section 401(a)(4) of the Tax Code, this type of plan is often appealing to professional firms such as law, engineering or medical practice groups.
Allocations may be based on a number of different scenarios, including salary, service, or position. This means owners and key employees may receive a much larger allocation than other plan participants. In fact, it is possible for the older, higher salaried owners, to receive 85 to 90 percent of the total dollars allocated to the plan, making this an excellent alternative to a defined benefit plan (which are often selected because they permit employers to allocate larger contributions to high salaried and older employees).
New comparability profit sharing plans are best suited for businessowners who want to minimize overall funding levels while maximizing funding for "key" employees, such as the owner and top management.
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