Are cross tested plans supposed to allocated contribution based on age -or- job classification ? ..... Which is it ?

[Moe Howard]

I've read that the purpose of cross tetsed plans is to be able to allocate a higher portion of contribution to certain employee(s) based on their older age and higher compensation .

I've also read that the purpose of a cross tested plan is to be able to allocate a higher portion to certain employe(s) based on their job classification.

So which one is it? Does the ability to favor certain employees, over other employees, in regards to contribution allocation, come from the [1] age & compensation status ..... or from the [2] job classification status ?

[Blinky the 3-eyed Fish]

A cross-tested plan's purpose is to provide some people with a contribution of a higher percentage of compensation that other people. The motivation varies to be sure from plan to plan, but in the small plan market, the motivation is clear - to provide the owners and other "important" employees with higher amounts.

[Moe Howard]

Blinky, so you are saying that the plan can be written either way? Meaning that the "cross tested plan document" can be written to allocate on either "only age & compensation" --OR-- "only job classification" ?

[WDIK]

Generally speaking, participants are divided into classes based on some designation (ownership, job classification, etc.). Then contributions are allocated to each participant in some manner relating to their compensation within their specific class. The factor of age comes into play as the "conversion" is done to test on benefits rather than on contributions.

[Blinky the 3-eyed Fish]

Moe, no I am not saying that at all. To have allocation groups based on age would certainly be a violation of the ADEA, but grouping on job classification or salary is certainly available. Actually, the IRS has accepted documents with everyone in their own allocation group, although there are some issues as to is validity (see some prior discussions on this message board).

[AndyH]

I'll try to help you guys out a little.

A "cross-tested" defined contribution plan is designed to take advantage of different ages of different participants. A number of criteria can be used to determine who gets what, but in general these plans are designed to give higher $$$ to older people. Typically, however, this is disguised by using classifications of people and giving different classifications of people different contribution levels. If such a plan is to pass testing, however, generally speaking higher contribution levels must go to some older people, although not necessarily all older people.

Does that help?