Cross-Tested 401(k) Profit Sharing Plan Illustration
The contributions for Cross-Tested Plans are based on the employees’ age, compensation, the employee classes, and the percent of contribution for each class decided by the employer.
Cross-Tested plans (also known as New Comparability or Age-Weighted Plans) work extremely well where the owners or key employees are more advanced in age than other employees. They are generally set up in conjunction with a 401(k) Profit Sharing Plan. The plan can be used with any number of owners, key employees, and other employees. The following is only one example of how a Cross-Tested 401(k) Profit Sharing Plan can benefit your company. This example illustrates the maximum contribution available for the owner while providing the minimum required contributions for the non-owners in order to pass the required nondiscrimination and participation testing:
| SUMMARY OF CONTRIBUTIONS | |||||||
| Employee | Age | Compensation | 401(k) Elective Deferral | 3% Safe Harbor Contribution | Profit Sharing Contribution | Total | Contribution as % of Compensation |
| Owner | 55 | $290,000 | $26,000 | $0 | $38,500 | $64,500 | 22.2% |
| Employee 1 | 55 | 63,000 | 0 | 1,890 | 901 | 2,791 | 4.4% |
| Employee 2 | 50 | 58,000 | 0 | 1,740 | 829 | 2,569 | 4.4% |
| Employee 3 | 45 | 53,000 | 0 | 1,590 | 758 | 2,348 | 4.4% |
| Employee 4 | 40 | 48,000 | 0 | 1,440 | 687 | 2,127 | 4.4% |
| Employee 5 | 35 | 37,000 | 0 | 1,110 | 529 | 1,639 | 4.4% |
| Employee 6 | 30 | 34,000 | 0 | 1,020 | 486 | 1,506 | 4.4% |
| Employee 7 | 25 | 36,000 | 0 | 1,080 | 515 | 1,595 | 4.4% |
| Total | $26,000 | $9,870 | $43,205 | $79,075 | |||
| SUMMARY OF TOTAL CONTRIBUTIONS | Total | % of Total |
| Total Contribution for Owner (including deferrals) | $64,500 | 81,6% |
| Total Contributions for Employees | 14,575 | 18.4% |
| Total Contributions & Deduction | $79,075 | 100.0% |
| SUMMARY OF TAX SAVINGS & CASH REQUIREMENTS | ||
| Total Contribution for Owners (including deferrals) | $64,500 | |
| Total Contribution & Deduction | $79,075 | |
| Less: Estimated INCOME TAX SAVINGS | – 36,000 | |
| Net Cash Paid Out | $43,075 | – 43,075 |
| Owner’s Contribution Paid by TAX SAVINGS | $ 21,425 | |
| CONCLUSION |
| Not only is the Owner receiving a contribution of $64,500 by only paying out a net cash amount of $43,075, the other employees are receiving contributions totaling $14,575 without any additional cash outlay after current tax savings. |
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Additional assumptions used in above calculations:
- Total Owner combined Federal & State Income Tax Rate assumed at 45%. You should consult your tax advisor as to the actual tax rates and your actual amount saved.
- The contribution and percents to the groups can vary year to year at the discretion of the employer, within legal limits.
- The numbers of participants included in the illustrations were limited for simplicity and comparability. However, all of the plans are able to serve from one to hundreds of participants.