What is necessary each year for cross testing allocation systems?

Cross testing allocation systems are designed to maintain compliance with non-discrimination requirements under the Internal Revenue Code. This means that contributions made to different types of retirement plans must not disproportionately favor highly compensated employees over non-highly compensated employees.

To ensure that the plan does not violate these rules, annual non-discrimination testing is essential. This testing evaluates whether contributions made on behalf of different employee groups meet the required standards. Specifically, it helps to confirm that the benefits accrued are equitable and that highly compensated employees do not receive an unfair advantage in terms of contributions or benefits compared to other employees.

This process often involves analyzing the contributions and benefits allocated to different employee categories and ensuring that the plan maintains the required ratio, adhering to regulations to avoid costly penalties and plan disqualification.

While employee input and monthly reviews of contributions could serve as useful practices in a broader plan administration context, they do not replace the necessity of conducting comprehensive non-discrimination testing annually to comply with federal regulations and maintain the plan's qualified status. Thus, annual non-discrimination testing is a crucial requirement for ensuring the effectiveness and compliance of cross testing allocation systems.