3862 / What are the requirements for cross tested plans?
Editor’s Note: The SECURE Act made changes that make it easier for certain sponsors of closed defined benefit plans to satisfy their nondiscrimination testing requirements.1 See Q 3860 for details.
Cross testing is the process by which defined contribution plans are tested for prohibited discrimination on the basis of benefits and defined benefit plans are tested on the basis of contributions. The general rules for converting allocations under a defined contribution plan to equal benefits and for converting benefits under a defined benefit plan to equal allocation rates are explained at Treasury Regulation Section 1.401(a)(4)-8.
The most common form of cross testing is comparability testing of profit sharing plans. That is because it is normally more advantageous for older and more highly compensated participants to have contributions to a defined contribution plan tested on the basis of equivalent benefits than it is to have benefits in a defined benefit plan tested on the basis of allocations. The comparability feature uses cross testing to show that contributions under a plan provide nondiscriminatory benefits. Cross testing also can involve aggregating a defined benefit plan with a defined contribution plan, and testing plans together on the basis of the benefits they provide.