What Are Cross-Tested Plans? (And No, They’re Not a New Fitness Craze)
Let’s carve this up nice and easy.
Cross-tested plans—also called new comparability plans—are plans that look at how much retirement plan contributions will provide as benefits at retirement age, as a percent of pay.
In plain English: They’re a way for business owners to dish out retirement dollars more strategically.
- Can be applied to any plan that allows profit sharing
- Still follows all the same IRS rules and retirement plan basics
- Gives employers more control over who gets what and how much
It’s like making one pie, but cutting bigger slices for the people who’ve been at the table the longest (or, you know, own the table).
Who Should Cozy Up to a Cross-Tested Plan?
These plans can be pumpkin-spice perfection (if you’re into that sort of thing) for:
- Small to mid-sized business owners who want to maximize savings for themselves and key staff
- Companies with a big age gap between management and rank-and-file employees
- Employers looking to reward specific groups (owners, officers, long-timers, managers, etc.) without over-stretching the budget
- Businesses pairing with a cash balance plan to crank contributions up a notch
The older the key employees (compared to the rest), the more favorable the math. It’s not ageism—it’s just actuarial science.
When Does It Make the Most Sense?
Employers should pull this one out of the oven when:
- They want more flexibility in how much they contribute each year
- They’re profitable and looking for tax-smart ways to reward your inner circle
- They’ve got a seasoned leadership team and a younger general workforce
- They need help getting around 401(k) deferral contribution limits for Highly Compensated Employees (HCEs)
And because profit-sharing is optional each year, you can serve up zero or generous helpings depending on your bottom line.
Translation: You control the budget—no commitment to contribute every year.
Main Perks of These Plans
Let’s baste this down to the basics.
More to Owners + Key Employees. Employers can contribute more to the people who’ve earned their seat at the head of the table or are closer to retirement and could use the extra serving.
Flexible Contributions. One year’s feast can be next year’s fast. No problem.
Helps with 401(k) Testing. It can solve headaches for business owners who get limited in what they can contribute due to IRS rules.
Tailored Benefit Design. Cross-testing allows employers to group employees and allocate contributions differently for each—like building mini menus for each dinner guest.
But What’s the Catch?
Glad you asked before reaching for a second helping.
Extra Testing. There’s special nondiscrimination testing each year to ensure fairness. It adds a bit more administrative cost.
Demographics Matter. Small changes in teams—like hiring a few older employees—can flip test results. That’s why good planning matters.
Best served with year-end strategy sessions and a retirement plan consultant who knows their (cranberry) sauce. (Hint: Employers get these with EGPS.)
Want to Talk Turkey?
Let’s chat about whether a cross-tested plan makes sense for businesses before year-end. (That’s when the real retirement magic happens—no stuffing.)
Fill out the form below and we’ll send you our Cross-Tested Plan Guide and answer any questions you may have!
