Cross-testing Ideas

Tip of the day

By Stephanie Reagan

There are a number of ways to pass discrimination testing for the profit-sharing component of a company's retirement plan when some or all of the Highly Compensated Employees (HCEs) are receiving higher profit-sharing allocations.  One way is to restructure the plan into two or more "component plans". 

The plan as a whole must satisfy the coverage requirements of 410(b) as well as the top-heavy requirements.  When testing the components, each can be tested on a different basis - one can be tested on an allocation basis and one on a cross-tested benefits basis.  If the cross-tested benefits basis is used, the minimum gateway contribution must be provided to all of the benefiting Non-Highly Compensated Employees (NHCEs) in the plan.

Creating the groupings

  • Try grouping the older HCEs and younger NHCEs together and group the younger HCEs and the older NHCEs together.

  • Since an owner's spouse or child would be considered a separate HCE for testing purposes, if either is working for the company, you could provide the lower NHCE profit-sharing contribution % to them in order for the HCE group (receiving a higher profit-sharing contribution) to pass coverage.

The discrimination testing rules are pretty complicated so all of the variables of a particular plan need to be taken into account to determine how best to formulate your testing procedures.

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