A cross-tested plan also has a 5% gateway, which means that at least 5% must be contributed for all non-
highly compensated employees. In general, cross-testing is a good and legal way to skew contributions in
favor of older employees, but it does come with higher administrative costs. Cross-testing should just be
understood conceptually.
Age-Weighting
A much more complicated cousin to cross-testing is called
age-weighting
. In an age-weighted plan, the
benefits must be structured so that everyone receives the same rate of benefit accruals. You will not
need to calculate an age-weighted benefit on your own, but you will be required to understand how this
works conceptually. It will be easiest to explain the concept of age-weighting with an example.
Consider a plan with three participants. Jen, age 50, earns $150,000. John, age 35, earns $30,000.
Stephanie, age 28, also earns $30,000. Jen is the business owner and she wants to contribute $75,000 to
an age-weighted plan in 2016.
The first step is to convert all three employees to the same rate of benefit accruals. We will use a rate of
1% of each employee's monthly pay. So, Jen’s 1% benefit accrual equals $125 ([$150,000/12 months] x
1%). Since both John and Stephanie have the same gross compensation, they will both have the same 1%
benefit accrual of $25 ([$30,000/12 months] x 1%).
The second step is for an actuary to use a government mortality table to find the current contribution
equal to $1 of benefit. Since you will not need to calculate this yourself, the table value of $95.38 will be
a given. We then apply this table’s value to each person’s benefit accrual to determine their future dollar
need. Jen will need $11,922 ($95.38 x $125), and both John and Stephanie will each need $2,384 ($95.38
x $25).
If we assume that plan assets will grow near the historical average of 8.5%, then we can calculate the
current dollar amount required to provide the needed future dollar amount. Susan will need $3,506 of
current contribution to yield $11,922 at 8.5% interest over 15 years (her time until retirement). This is a
simple time value of money application. John will need $206 of current contribution to yield $2,384 at
8.5% after his 30 years expected remaining working life. Stephanie will only need $117 of current
contribution because she has 37 years until reaching the normal retirement age of 65.
Now, we will calculate each participant’s age-weighted required percentage allocation of the planned
$75,000 total contribution. Jen should receive 91.57% of the contribution because her current
contribution needed of $3,506 is 91.57% of the total $3,829 ($3,506 + $206 + $117) required. John
should receive 5.39%, while Stephanie should receive 3.04%. One caveat with this process (there are