Have you ever wondered what exactly a cross-tested profit sharing plan is? Have you heard someone talk about how wonderful their cross-tested plan is and wonder what they are talking about?
Cross-testing is a term used to describe the technique where profit sharing allocations are converted to a projected benefit at retirement to pass nondiscrimination tests. If you are an older owner of a business, and your staff is significantly younger, you may realize cost savings from this plan design.
The theory behind the design is this: as an older participant, you have a shorter time before you retire. Your younger staff has a longer time before they retire, therefore a longer time for their money to grow. In most cases, the minimum contribution you would have to provide for your staff is five percent of their compensation.
This design feature can be added to a 401(k) plan. If you already have a profit sharing plan, you can amend your current plan document, prospectively, to take advantage of plan design. Please contact your Rea advisor today if you would like to learn more.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, June 18, 2008.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.