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|
|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|
|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.