Cross Tested Contributions Discretionary?

[Guest Thornton]

My understanding is that cross tested formulas are discretionary. Cross testing is simply the allocation method.

Question: A super integrated formula provides for x% on the first say $54,000 of comp and xx% on comp above that. It would seem that this contribution is required each year. Can someone explain it to me?

[MWeddell]

The amount of the contribution must be in the plan document if the plan is a money purchase pension plan (including a target benefit plan). It you're dealing with a profit sharing or stock bonus plan, the plan document only needs to stay an allocation formula and not obligate the employer to contribute a certain amount. However, if the plan document requires a certain amount, then one must follow the plan document. Hence, the short answer is check the plan document. From what you've said, it sounds like the plan document requires specified percentages to be contributed.

[Guest Thornton]

In this case, the p/s contribution is discretionary, allocated 3% on comp of $0 to $60,600. 6% from $60,600 to $80,000 and 23% from $80,000 to the salary cap. This latter % varies based on testing results. Also, since this plan also has a 401(k) defferral and match component, the first 3% tier is required. Question: Can the company deposit only the 3% in a given year? Can it do first two tiers only, or variations of this?

[Tom Poje]

the document should provide guidence.

for example

1.the company shall allocate 3% to all eligible employees.

if there is insuufficient contribution to cover, the contributions shall be pro rata based on compensation.

2.if there are additionals $, an additional contrib up to 3% shall be allocated to all participants based on compensation in excess of 60,000.

3. if there are any remaining contributions, they shall be allocated to all participants on compensation in excess of 80,000

obviously, your document may be worded slightly differently, but should be somewhat similar. (Hopefully it is not written like a money purchase, 3% will be alloacted on this comp, 6% on this, 23% on this comp. If so, you have problems, though you could probably argue 'its a profit sharing plan, the formula was written incorrectly - in fact its nonsensical with the type of plan. what was intended was ... (Don't know if you could win that arguement, but...)

anyway, assuming plan is truly discretionary, with a 3 step formula, then you could certainly allocate just 3%.

I have seen some formulas which would say 3% < 60000

6% 60000 to 80000

23% > 80000

if insufficient contribution made, then the %s will be adjusted prorata.

assuming plan is top heavy, you can get by with 3% across the board. Same argument, I put in 0 contribution. Oh, plan is top heavy, now I have to contribute an additional 3%.