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I just had a such a good idea. The IRS should provide guidance!! Can someone please call them and make this suggestion? Thanks in advance!!

I'm assuming these were/are all DC plans, because DB plans must use actuarial value of assets (usually FMV) for determining funded status and minimum required contributions.

It wouldn't be forced to an outside IRA in that case? Is it under $1,000?

This is the right place. A cross-tested PS formula means that there will be different contribution rates to different employees. (Thinking, the IRS typically would expect a plan to provide some uniformity to the contributions.) But if the contributions can be projected to retirement age, perhaps the eventual benefits from those contributions will be closer to equivalent. Especially if the people getting more are so close to retirement age that there's not much of a projection, relative to a 30-year-old who could start with a lot less but let the time do the work of growing to a comparable benefit. Anyway, that's the "cross" to the definition - instead of testing contributions, we're crossing it up and instead testing the eventual benefits. Okay, so now the IRS came up with "gateway" rules to try to put the kibosh on just hiring 16-year-olds, giving them $100, and saying hey 50 years of time should even things up compared to the company owner who's 65 and wants $69,000 in profit sharing *currently*. Basically the gateway rules force a guaranteed floor on how low the $100 to the youthful staff can be, and it's typically a percentage of pay that depends on what sort of amounts the highly compensated employees are getting from the company. Not all plans like this, where the plan does not provide a uniform rate to all employees, are subject to gateway rules, but most are. The ones that aren't could potentially include your hoped-for design. There are regulations which spell out what kind of designs may get away with this. Typically they involve bands by age, so that all employees have the chance to "age into" the higher rates. A common approach is to age-weight the contributions so that every single age ends up with an equivalent benefit rate at retirement age. (Basically each person the same age gets the same rate, and that rate goes up by an identical 8.5% a year as you age.) If you do get a plan that fits the exceptions, then it's okay if certain individuals' contribution rates are smaller than what these "gateway" rules would require. Anyway, I suspect your PEO wants no part of making sure your subset's allocations can fit into such a design, so they're telling you just to go with the more-common approach where you do guarantee a gateway floor rate to the staff employees.

This is all wonderful news. I think probably 80% of my clients (i.e., the smaller ones) will not adopt this provision. Wonderful sentiment, but execution is so incredibly infeasible. And if you have less than 50 employees, you might have one person every 3 or 4 years eligible for this, and how many of them can actually contribute more than $30,000??? I just don't get it. This is wonderful for IBM and Microsoft and Amazon, but down here in the weeds it's the last thing anyone wants to deal with.