Cross-Tested 401(k) Plan

What is a Cross-Tested 401(k) Plan?

A Cross-Tested plan, or often referred to as a New Comparability plan, is a profit-sharing retirement plan in which the employees are divided into groups. Each group receives an employer contribution that represents a different percentage of compensation. The plan works particularly well where the owners of a business (each of whom is almost always found to be a “highly compensated employee” for purposes of the qualified retirement plan nondiscrimination rules) are different ages, thus precluding the adoption of an age-weighted type of profit-sharing plan.

A cross tested plan is ideal for a company where the goal is to maximize employer contributions to certain groups of people. Whether that be a group of owners or a specific division a cross tested plan can be an ideal plan design to maximize pre-tax contributions.

Maximum Deferral Amount (employee contributions):

  • The IRS Limit: $20,500 for 2022

Catch Up Contribution (for participants over age 50):

  • The IRS Limit: $6,500 for 2022; participants over age 50 may contribute $27,000 for 2022 ($20,500 + $6,500)

Eligibility Requirements (optional):

  • You may require an employee complete 12 consecutive months of employment with at least 1000 hours of service during those 12 months (one year of service).
  • You may choose to exclude employees who are under age 21.

Entry Dates (optional):

  • Monthly, quarterly or semi-annually.

Employer Contributions:

  • Cross-tested 401(k) plans combine Safe Harbor 401(k) contributions with discretionary contributions. Using this combination of employer contributions, cross-tested plans are able to receive a “free pass” on the ADP test and generally satisfy any Top-Heavy testing requirements. This further allows for owners to receive the IRS’ Annual Additions Limit ($61,000 for 2022, plus catch-up of $6,500 making it $67,500 for those over 50 years of age).
  • Safe Harbor 401(k) contributions:
    • Matching formula: At least 100% of the first 3% of salary deferred plus 50% of the next 2% of salary deferred. For example: An employee that contributes 5% of their salary of more would receive a match equal to 4% of salary.
    • Profit-Sharing Formula: At least 3% of compensation
  • Discretionary contributions: Your 401k provider will work with you to determine the optimal strategy with regards to employer contributions.  This could be in the form of an additional discretionary profit-sharing contribution or matching contributions.

Vesting:

  • Safe Harbor 401(k) contributions are immediately 100% vested.
  • Discretionary contributions may be subject to a vesting schedule of up to 6 years.

Loans/Hardships:

  • Loans and Hardship withdrawals are permitted.
  • Minimum loan amount is $1,000.
  • Maximum loan amount is one half the vested account balance but no more than $50,000.

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