How are employees grouped for cross testing allocation methods?

Employees are grouped for cross-testing allocation methods by categorizing them based on their status as Highly Compensated Employees (HCE) or Non-Highly Compensated Employees (NHCE). This classification is crucial because cross-testing is a method used to ensure that a plan complies with the non-discrimination requirements set forth in the Internal Revenue Code.

By distinguishing between HCEs and NHCEs, plan administrators can evaluate the benefits being provided to each group. The goal of cross-testing is to determine if the retirement plan's allocation of contributions or benefits satisfies the requirement that it does not disproportionately favor those who are highly compensated. This helps ensure that the plan remains compliant while maximizing benefits for employees overall.

Other options, such as grouping by preferred retirement age, departmental affiliation, or years of service, do not align with the regulatory framework that governs how contributions must be allocated across different employee classifications to prevent discrimination against lower-paid workers. Thus, categorizing employees by their compensation status is the correct approach to cross-testing.