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Cross-tested Profit Sharing Plan FAQs with Example
Q. What is a cross-tested or new comparability profit sharing plan?
Under a “cross-tested” or “new comparability” plan, participants are divided into groups with different contribution rates that are targeted to benefit specific groups, for example, older, long-term, more highly-paid participants. Contributions are deposited to participant accounts and are invested. When a participant terminates employment, they take the vested account balance in a lump sum.
Q. Can cross-tested plan contributions change from year to year?
Yes. Because contributions to a profit sharing plan are discretionary, the plan sponsor has considerable flexibility to vary employer contributions from year to year.
The required IRS non-discrimination testing is accomplished by comparing the benefits provided at retirement rather than the amounts contributed to their account currently. The process of converting contributions to benefits at retirement is called “cross-testing”.
Q. What types of plan sponsors are good candidates for cross-tested profit sharing plans?
Plan sponsors with the following characteristics:
The plan sponsor wants flexibility in determining the amount of contributions to be funded from year to year.
The plan sponsor’s principals are, on average, older than the rank-and-file employees who are looking to limit the amount of contributions allocated to their rank-and-file employees.