Cross-Tested Profit Sharing Plans allow the amounts allocated to participants to be "converted" to monthly benefits at normal retirement age for testing purposes - in other words, the plan is tested just like a defined benefit plan. Different allocation rates can be set for classes of participants. Typically, a cross-tested plan is designed to maximize the target employees at the $46,000 limit and minimize the cost for other employees. Depending on the plan design, the minimum amount required for non-highly compensated employees can range from 3% to 5% (assuming complex testing is passed.) Cross-tested plans are often combined with 401(k) features for maximum flexibility.
Since they look like profit sharing plans, cash balance plans are usually easier for participants to understand. They usually provide higher benefits for younger employees and lower benefits for older employees, so the costs are higher for younger employees and lower for older employees.
| Name | Plan Compensation | Age | Salary Deferrals | Safe Harbor / Gateway Contribution | Cross-Tested Profit Sharing Contribution | Total |
|---|---|---|---|---|---|---|
| Dr. Smith | $230,000 | 53 | $20,500 | $10,166 | $20,334 | $51,000 |
| Dr. Jones | $230,000 | 49 | $15,500 | $10,166 | $20,334 | $46,000 |
| Office Manager | $48,000 | 39 | - | $2,122 | - | $2,122 |
| Physician Assistant | $35,000 | 30 | - | $1,547 | - | $1,547 |
| Technician | $35,000 | 33 | - | $1,547 | - | $1,547 |
| Nurse | $22,000 | 27 | - | $972 | - | $972 |
| Office Assistant | $20,000 | 25 | - | $884 | - | $884 |
| Totals: | $27,404 | $40,669 | $104,072 | |||
| Dr. Smith and Jones receive over 93% of total contributions to the plan. | ||||||
Where they Fit:
- Professional Practices
- Small closely-held businesses
- Client does not wish to exceed the $46,000 ($51,000 if age 50 or older)
- Client desires flexibility in contributions