Why have “Cross-tested” (also known as “New Comparability”) Profit Sharing Plans become so popular in recent years?
Depending on employee demographics (e.g., age, compensation, dates of hire), the cross-tested profit sharing plan, which allocates different contribution levels to different job classifications, can often leverage a larger share of the overall profit sharing contribution in favor of a target group of employee(s) such as an owner and/or management. These plans work best where the rank-and-file employees are younger than the selected target group of employees. For example, a scenario of where the owner is age 45, and employees, on average, are age 30 makes a good candidate for a cross-tested plan. Cross testing allows a profit sharing contribution to be converted to a defined benefit-like annuity at retirement. Some fairly complex-testing goes on behind the scenes that tests discrimination of contributions projected to retirement age (instead of current ages). This ability to test discrimination of current contributions, at each participants assumed retirement age, often allows for much
