Dogging On Cross-Testing

Given the myriad blogs permeating the Internet, I didn’t want to launch Pozek On Pension with my pontifications about some hackneyed topic.  Congressman Lloyd Doggett (D-TX) was kind enough to provide some commentary-worthy fodder when he introduced The Retirement Fairness Act of 2009 (H.R. 4126) which, among other things, seeks “to prevent the overstatement of benefits payable to non-highly compensated employees under qualified plans” by eliminating cross-testing.

Several things strike me as odd about introducing a bill like this.  First, in a letter requesting support from his colleagues, Congressman Doggett describes cross-testing as a loophole that encourages “abusive and discriminatory practices.” According to Dictionary.com, a loophole is 1) “a means or opportunity of evading a rule, law, etc.,” or 2) “a way of escaping a difficulty, especially an omission or ambiguity in the wording of a contract or law that provides a means of evading compliance.”

The Treasury Department provided clear direction on how to employ cross-testing in final regulations issued in June 2001.  These regulations specifically addressed concerns about potentially abusive plan designs by creating the minimum gateway contribution that generally requires an allocation of at least 5% of compensation to all eligible NHCEs.  With such specificity in the regulations, it seems a bit of a stretch to characterize cross-testing as “an omission or ambiguity in the wording of a…law that provides a means of evading compliance.”  It is not a means of evading a law…it is the law.

Second, many small business owners only agree to make company contributions on behalf of their employees when it becomes more cost-effective to them via cross-testing.  The gateway requirement insures a minimum benefit that is comparable to or greater than the average employer contribution rates published in many industry surveys.  Not to mention, the 5% gateway exceeds the minimum required contribution to satisfy the top-heavy rules or to fund any of the 401(k) safe harbor plan designs.

Anecdotal evidence suggests the elimination of cross-testing would likely result in the discontinuance of employer contributions or the complete termination of many small-business retirement plans.  Amidst the well-publicized concern about the adequacy of defined contribution plans, it seems counter-productive to attack a law that allows small businesses to provide meaningful benefits to rank-and-file employees in a cost-effective manner.

Comments

[Doug]

Agreed.

If this legislation is passed, most small employer plans will terminate.