Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome.
Have you taken a closer look at your plan document lately? A quick review may indicate that your plan is cross-tested, which only means the employer, has some flexibility with their discretionary contributions. As a plan sponsor, you can contribute and allocate a higher profit sharing contribution to the keys and HCEs while allocating a lower contribution the lower paid employees. Participants in a cross-tested plan are divided into several criteria and this is listed in the plan document. The criteria can either be (but not limited to):
- Age
- Ownership
- Compensation
Annually an allocation is set for each group and the employer’s profit sharing contribution is converted to a projected benefit at retirement. This plan design is favorable to keys and HCEs hence a minimum gateway contribution should be given to NHCEs. Too many changes in the profit sharing contributions from year to year could affect the non-discrimination testing for the plan. Please consult with your service provider for more information on cross-tested plans.
This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.
401kBasics 