Are cross-testing allocations designed based on safe harbor methods?

Cross-testing allocations are not designed based on safe harbor methods. Instead, they rely on a specific testing methodology established under the final regulations of Internal Revenue Code Section 401(a)(4). Under cross-testing, employers can demonstrate that their contributions are nondiscriminatory by using a test that assesses whether the benefits provided to highly compensated employees are proportional to those provided to non-highly compensated employees, rather than following a predetermined safe harbor formula.

Safe harbor methods generally offer simpler strategies for complying with nondiscrimination requirements, allowing for certain levels of contributions to be deemed compliant without further testing. However, cross-testing is more complex, as it allows for differences in contribution rates and is typically used in profit-sharing plans, enabling a more tailored approach to meet nondiscrimination requirements. Therefore, saying that cross-testing allocations are designed based on safe harbor methods is inaccurate.