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Regulation and Compliance > Federal Regulation > IRS

Cross-Tested Plan Use Could Expand

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Hopes that cross-tested profit-sharing plans could be used with standardized or prototype documents to make them more affordable and easier for an employer to adopt hinges on new language expected from the IRS.

Cross-tested plans, with their ability to allow bigger contributions to certain groups of employers, are no newcomer to the retirement market, but one that encourages small employers to offer a plan, according to planning professionals. Formerly, they could only be used with individualized or custom documents, which are more expensive and require more administrative maintenance.

The IRS has collected comments and is due to release a “listing of required modifications” (LRM), basically new requirements that retirement plans will have to meet in order to use the standardized Master & Prototype (M&P) Plans, as they are called.

The hope is that the IRS will allow more options for employers to go to a less expensive document with the need to amend the documents less frequently. Some employers now have to amend their forms annually, making offering cross-tested plans with different allocation groupings a somewhat costly administrative burden.

However, the IRS is looking to make changes from a context of compliance, notes Robert Richter, VP, Document Consulting Services for SunGard Corbel in Jacksonville, Florida, who is responsible for drafting these plan documents. The agency is “worried employers will inadvertently select a plan design that requires significant non-discrimination testing,” he says. They could fail to realize that a cross-tested plan has “a non safe harbor plan design that requires some fairly complex non-discrimination testing.”

There is the potential–under whatever new language is released–that 99% of the cross-tested plans aren’t going to fit the plan design allowed in the prototypes, Richter says. Employers are making decisions about what document they will use in 2008 and 2009 under EGTTRA, and these documents and restatements would have to be filed by January 31, 2006, he warned.

Martin Pippins, IRS actuary working on the LRM, says that although there is no time frame for release of the finalized language, “it is a very high priority.”

Plan professionals do hope the new language will allow more flexibility in defining different employee allocation groups. Specifically, the industry is looking for different ways to create contribution bands or rate groups for employee groups other than the “highly-compensated employee” and the “non-highly compensated employee” groups allowed in the current language, including different allocation groups within those two designations. Many firms reportedly find the current two bands limiting, and would like to offer different levels of employer contributions to, say, junior partners, associates, partners, and administrative staff.

“As currently written, most employers that maintain cross-tested plans will be unable to use prototype plans for their EGTRRA [Economic Growth and Tax Relief Reconciliation Act of 2001] restatement if they wish to continue to maintain their current cross-tested formulas,” stated the American Society of Pension Professionals & Actuaries in a July 18th letter to the IRS.

“Probably 99% of the cross-tested plans we work with define groups in a manner that would prevent them from using the prototype, so they would have to use a customized document or an ‘individually designed plan,’ and that is more expensive,” says Adam Pozek, manager of consulting services for Swerdlin & Company in Atlanta.

“Many plans we work with would like to have cross-tested plan possibility, but don’t want to have a more expensive plan document if they do use it.”

BISYS Retirement Services anticipates a 10% to 20% increase in sales of cross-tested plans over the next year if the language becomes more flexible, according to Charlie Wenzel, of distribution and sales.

Todd Berghuis, VP of BISYS’s ERISA Consulting Services, agrees: “It will take one of the expenses out of the process. Cost has been a deterrent in the past due to the custom documentation required [for] multiple rate groups.”

For more information on the IRS LRM, go to: // .


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