Cross-Tested Plans Survive A Major Challenge

In general, the favorable tax treatment afforded to the participants and sponsor of a qualified retirement plan are contingent upon the plan satisfying certain statutory and regulatory requirements, including the prohibition against discrimination in favor of highly compensated employees. Compliance with this requirement can be tested by any of a number of alternative methods prescribed by the regulations.

Typically, defined contribution plans are evaluated with reference to the allocation of contributions. However, they may be tested by converting the contributions allocated to participants to equivalent benefits, using a permissible interest rate. Likewise, defined benefit pension plans and defined contribution plans may be aggregated and tested as a single plan using similar methodology. This is referred to as "cross-testing."