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Cross Testing

CROSS-TESTED RETIREMENT PLANS can provide contributions and benefits that don’t fit into the IRS pre-approved design templates.

Employers can use them for many different objectives, e.g. rewarding long service employees or profitable business units.  The can provide significantly larger benefits to business owners (and other highly compensated employees) than would be possible with a standard design.

The term “cross-testing” isn’t religious, and it has nothing to do with vampires.  It comes from §401(a)(4) of the Internal Revenue Code, which says a retirement plan is OK “if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees”.

200+ pages of IRS regulations go on to describe what that means.  The “or” (our emphasis) means that you can convert contributions into benefits – and then test the resulting benefits for discrimination.

Cross-testing turns out to be an extremely powerful tool, and it can demonstrate that nonstandard profit sharing plans, cash balance plans or combinations of plans across multiple business units are nondiscriminatory.

Take a look at cross-testing how-to and examples for more detail.

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