New Comparability / Cross Tested Plans
The New Comparability/Cross Tested Plan could be an option for an employer that wishes to reward key employees while contributing a minimum amount for other employees. The employer sets up the plan to maximize contributions to the company owner(s), to reduce the cost of employee benefits, or to benefit key employees.
New comparability or cross testing allows a plan to give a participant a certain dollar or percentage contribution that allows the contribution to be tested on a benefits basis. Basically, the actual contribution is converted into a number which is the amount that the benefit would be worth at the participant’s retirement age. This design works especially well when the targeted participants are older than the remaining participants, a favorable plan design for an older owner with younger employees.
There are a number of complicated steps to the testing process when converting the contribution dollar amount to an equivalent retirement benefit. There are numerous pieces to the test that need to pass and the results of the testing are largely based on the demographics of the participant group. The contribution is flexible in that it can be determined annually and is not mandatory, however; just because the test passes one year does not guarantee that it will pass in future years.
If the employer is looking to maximize the contributions to a select group of participants while keeping their overall contribution cost to a minimum, a new comparability or cross tested plan might be advantageous for the employer.
Note: A new comparability plan can be combined with other retirement plans.