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A plan decides upon a profit sharing contribution for 2017 that allocates a different dollar amount and percentage to each participant.  This complies with the cross-tested formula in the plan document and passes testing.  When preparing the notification from the employer to the Trustee (see Padilla memo), do we have to list each employee separately?  Can we refer to an attachment, which would be our allocation spreadsheet?

Alternatively, can we combine the 3% safe harbor and profit sharing when referencing the amount on the trustee notice?  This would make it much easier for this plan.  They basically were trying to allocate a set dollar amount to certain employees, but it is a combination of the 3% Safe Harbor and profit sharing, so the profit sharing is all over the board due to differences in compensation. 

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I've never heard of the Padilla memo. When our TPA provides the allocation to our  clients, our software splits everything  up between 401k/PS/Safe harbor. That's what we give to our client. Same procedure in the last TPA I worked for. Usually my client is also the trustee.

4 out of 3 people struggle with math

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this is the Padilla memo

 

Internal Revenue Service Memorandum

Date: March 13, 1998

To: Robert Padilla, Chief, EP/EO Cincinnati Key District

From: Director, Employee Plans Division, CP:E:EP

Subject: Requirement for definitely determinable allocations

On September 8, 1994, we issued a field directive concerning whether a profit-sharing plan that provided for employer discretion to determine amounts allocated to particular groups of employees satisfied the definite predetermined formula requirement under section 1.401-1(b)(1)(ii) of the Income Tax Regulations. The field directive concluded that this requirement was not satisfied for such a plan.

On July 30, 1996, we issued a second field directive which rescinded the prior field directive and illustrated several plan designs that satisfied the definite predetermined formula requirement.

You have asked whether the first field directive was rescinded in its entirety or was limited to the illustrated plan designs. The first field directive was revoked in its entirety. Consequently, the second field directive should not be interpreted as applying only to the illustrated plan designs, but rather to all plan designs. A plan would not violate the definite predetermined formula requirement if the employer has discretion to determine the amount of the contributions to be allocated to particular groups of employees defined under the plan and the plan specifies the method for allocating these amounts among the employees within each group. The number of people in each group or the number of groups is immaterial provided that each group is identifiable under the plan and the identity of particular employees in each group is not subject to employer discretion. It is also immaterial that the purpose for forming the groups is to satisfy the cross testing requirements under section 1.401(a)(4)-8. For example, a plan with defined groups including a group with one person (i.e. 100% shareholder) would not violate the definite predetermined formula requirement.

Although the plan can provide for employer discretion to determine the amount of employer contributions for each group, the plan must require that the employer notify the trustee, in writing, of the amount of contributions for each group. This requirement does not mean that the plan must provide the specific amount of contributions for each group. Instead, the plan must provide that the trustee be given written notification from the employer as to the amount of the contribution to be allocated to each group.

If you have any further questions regarding this matter, please call Mr. Al Reich of Technical Branch 5 at (202) 622-7976.

Date Published: 03-13-1998

Date Added to File: 05/03/99 09:55 PM EDT

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We always notify the plan sponsor of the contributions by money type as well, when we first provide options, but I don't think this system generated spreadsheet is sufficient to meet the requirement.

Tom,

Can you tell me if I can combine the safe harbor and profit sharing when preparing this memo? 

Can we reference an attachment,which provides the dollar amount of profit sharing per person?

Either of the above would make it much easier to meet this requirement.

Thank you!

Kathryn

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well, I don't think there was anything describing a specific format, so go with what you can generate.

we use Relius, so I modified an allocation report to provide a breakdown, this particular version prints by division, if date of hire was last year or current year it prints, as well as age if less than 21 - just in case comp is from date of participation, which print in the allocation comp column.

I also put on hours if less than 1000 and DOT if any, and a blurb at the bottom with a signature line.

might be more than needed. but the dates, hours and stuff make my life easier checking the allocation as well, but as long as I have everything I simply send that and I assume makes it easier on the client as well.

this is simply the last page of the report, which turned out to be the group labeled otherwise excludable. If plan could have passed testing separately this group would not have received the 1.44% ps, but only the safe harbor, but to pass testing everything had to be combined and they needed the gateway.

 

  padilla.thumb.png.fa67f2780280d09a7cfa35c725cde297.png

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CEW - my understanding is you are not required to provide a memo to the trustee.  The memo was from Padilla at the IRS.  The email you are providing to the trustee with the report (as long as it shows the amounts allocated to each group) is sufficient.

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The plan must provide that the trustee be given written notification from the employer as to the amount of the contribution to be allocated to each group.

As a TPA, an email from me to the Trustee with a report would not meet this notification requirement.  

 

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First, this is a memo, right? Not official guidance?

It is interesting that this refers to the Employer providing the TRUSTEE with this written instruction. In many pre-approved documents, the plan specifies that the EMPLOYER (if OTHER THAN THE ADMINISTRATOR) must provide the ADMINISTRATOR with written notification of the contribution to be allocated, blah, blah, blah...

In many small plans, the Administrator IS the Employer. This would appear to negate the requirement.

Under the "duties of the Administrator" it is far less black and white. Ours, for example, doesn't hit it head on, but the closest clause is: to compute, certify, and direct the Trustee (or insurer) with respect to the amount and the kind of the benefits to which any Participant shall be entitled hereunder...

Question - has anyone ever had the IRS address this specific question? Seems to me like virtually any "written notification" that actually gives a breakdown (i.e. the valuation report or whatever) should be sufficient. Maybe I'm way off base, but I can't see getting too worked up over this. In my prior life a zillion years ago, (probably in response to the memo) we used to do a specimen corporate resolution specifying the allocation to each classification/group (this was before everyone in their own group) but it has been many years since I've seen that done routinely.

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5 minutes ago, Belgarath said:

In my prior life a zillion years ago, (probably in response to the memo) we used to do a specimen corporate resolution specifying the allocation to each classification/group (this was before everyone in their own group) but it has been many years since I've seen that done routinely.

We still do it this way.  

 

 

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@RatherBeGolfing

I have worked for 3 small TPA firms very recently and 2 of the 3 do not do anything at all, while one does the corporate resolution to which you referred, always has and still does.  I have been knowing this is one of the things I need to address where I am now - we need to start doing something - and I was thinking of going back to that corporate resolution model..

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It's on the long list of things that we "have" to do but many don't and there are no consequences.  Maybe not government "at its worst" but it's not good.

We do it, sometimes by spelling it out but more often with "everyone in their own group" by a very specific reference to the allocation report.  As noted above, the language is very specific that the trustee be given this information.  The reasoning is that this makes the allocations definitely determinable - of course that part is a joke but in some sense the trustee needs to know how to allocate the contributions when received.  There are scenarios where the plan sponsor does not wear all hats and it can't be assumed that just because it is in a val report it is generally known to all parties.

Ed Snyder

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We prepare a Contribution Declaration, with an attachment that provides the breakdown of the PS by participant. However, we do not include the Safe Harbor allocation, as there is no discretion with the SH source. Generally, a preliminary spreadsheet is provided to each Client that will detail all Employer contributions allocated for the plan year.

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On 6/12/2018 at 7:02 AM, K2retire said:

We provide a corporate resolution listing the total contribution referencing the contribution report for the breakdown.

We do this also and the resolution (declaration?  I forget the term used) has been requested in audits.

CBW

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