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Using integrated formula on cross-tested plan


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Being picky - but not really as this might be significant - your "allocation method" is still groups or whatever the plan doc says it is.  Your desired "allocation" just happens to be what an integrated formula would give you.  That should then pass general testing on a contributions basis, imputing permitted disparity.  But with, I believe, still some possibility of failure (channeling MP with the cryptic comment).

You might know this but some innocent lurking may not.

Ed Snyder

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3 hours ago, Lorraine Steinberg said:

I have a 3% SH cross-tested profit sharing plan that seems to work best at this time using an integrated allocation method.  Is it mandatory to use the full taxable wage base as the integration level?

I don't think I understand CuseFan's answer, because mine is NO.

You don't have to use the TWB; you can use less than the taxable wage base and use a 5.4% or 4.3% kicker on top as appropriate for a regular integrated plan.  Is that what you were asking?  And yes, you can pass non-discrim on that basis even though the plan (in  your mind at least) is "cross tested".  It is no longer cross tested if you instead applly the normal integration rules to show that you are non-discriminatory.

 

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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My impression has been that, if your plan language doesn't actually state that it's using a safe harbor formula - such as integrated at something less than the TWB, that the general non-discrimination test has to use the full TWB when imputing the disparity.

I've seen it one time where the general test then didn't work due to crazy circumstances, but it wasn't my client.  The plan document said everyone's his own group, but they ran it identical to a plan integrated at 80,000.  One HCE was only at 108,200, below the TWB, and so the person's rate imputed allocation rate was actually higher than anyone else's.

(Which is probably the kind of example Bird was referring to.)

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21 hours ago, Bri said:

My impression has been that, if your plan language doesn't actually state that it's using a safe harbor formula - such as integrated at something less than the TWB, that the general non-discrimination test has to use the full TWB when imputing the disparity.

I've seen it one time where the general test then didn't work due to crazy circumstances, but it wasn't my client.  The plan document said everyone's his own group, but they ran it identical to a plan integrated at 80,000.  One HCE was only at 108,200, below the TWB, and so the person's rate imputed allocation rate was actually higher than anyone else's.

(Which is probably the kind of example Bird was referring to.)

I don't agree with your impression. Do you have a cite for that?

I say you are not imputing permitted disparity.  You are simply meeting the requirements of the safe harbor of 401(l) (2)(A).

I suggest there is no reason why you have to use the full TWB as long as your numbers meet the safe harbor of 401(l).  We actually  have done this a number of times (less than 10 I would guess) over the years.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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If one is in an integration optimizing mood, this might be fun to play with:

https://benefitslink.com/cgi-bin/inte-greater/

I wrote it around 1992, using a nifty boxed Turbo Pascal programming kit I found in the clearance section at Office Depot. Businesses had stopped writing their own software programs for their Radio Shack computers and IBM PCs.

I had fun with the programming and wrote the "Inte-Greater." Later on, I decided to see if I'd enjoy making something called a "web site" when the World Wide Web thingie got big in 1995 ?

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Hi Larry -  The argument I'm making is based on the fact that the plan itself doesn't have a formula for allocating contributions.  The safe harbors under 1.401(a)(4)-2(b)(2) reference the plan allocating contributions under an "allocation formula" that's uniform (with the disclaimer in subparagraph (ii) that permitted disparity is okay).

But in the case above, the plan doesn't allocate on a formula.  Each participant is assigned a single contribution amount (that just happens to mimic an integrated formula).  So that's the language/technicality I get hung up on.  The plan is allocating based on a list of individual names and amounts directed by the Administrator, rather than a formula (which makes it feel less "safe" of a harbor in my mind).

Honestly, I'm not going for anything beyond a semantics argument, I suppose.

(p.s. Are you guys still getting Pizzeria Uno at the Relius meetings?)

 

 

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What was it you said the other day?  Oh, yeah..... SHEESH. If one has to perform the general test, the only integration level that can be used is 100% of the taxable wage base.  If the actual allocation mimics a safe harbor formula with an integration level less than the taxable wage base the general test will fail. This has been known and discussed for many years.  Good thing to confirm at Larry D's Symposium, if you are going.

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1 hour ago, Bri said:

Hi Larry -  The argument I'm making is based on the fact that the plan itself doesn't have a formula for allocating contributions.  The safe harbors under 1.401(a)(4)-2(b)(2) reference the plan allocating contributions under an "allocation formula" that's uniform (with the disclaimer in subparagraph (ii) that permitted disparity is okay).

But in the case above, the plan doesn't allocate on a formula.  Each participant is assigned a single contribution amount (that just happens to mimic an integrated formula).  So that's the language/technicality I get hung up on.  The plan is allocating based on a list of individual names and amounts directed by the Administrator, rather than a formula (which makes it feel less "safe" of a harbor in my mind).

Honestly, I'm not going for anything beyond a semantics argument, I suppose.

(p.s. Are you guys still getting Pizzeria Uno at the Relius meetings?)

 

 

I think you are overthinking.  All that matters is that the end result of the allocations (both the original plus the -11e amounts) is a safe harbor (integrated) allocation.  The -11g is part of the allocation process/formula.  There is nothing I know of that says otherwise.

And yes, Pizzeria Uno is still the provider of lunch for the Relius meetings!

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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35 minutes ago, Mike Preston said:

What was it you said the other day?  Oh, yeah..... SHEESH. If one has to perform the general test, the only integration level that can be used is 100% of the taxable wage base.  If the actual allocation mimics a safe harbor formula with an integration level less than the taxable wage base the general test will fail. This has been known and discussed for many years.  Good thing to confirm at Larry D's Symposium, if you are going.

I hear you but I'm not persuaded (yet).  You start with "if one has to perform a general test", but I'm suggesting you don't have to perform a general test if the allocation meets the requirements of 401(l) (2)(A).  I don't think the reg contemplates our scenario, and doesn't the law (the code) get preference over a reg?  My technical argument: I don't believe the parenthetical in 1.401(l)-2(d)(4) eliminates my argument.  I can argue that the -11g is part of the plan language when adopted and provides a formula for a specific combination that passes 401(l).  Would you feel better if the -11g actually had explanatory language saying that it is applying a formula of 80% of TWB + 1 (or whatever)?  I don't think such extra verbiage is necessary, but I can see the argument.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I don't see where anybody is talking -11g in this thread.  That just confuses things.  The fact is that the permitted disparity safe harbors are only available to structures that satisfy the permitted disparity safe harbors in connection with a written formula.  This thread has been talking about "a cross tested" plan, which everybody assumes mean everybody in their own group and that there is no formula of any kind and that there is no need for an -11g amendment of any kind.

To confirm that the entire industry thinks it works this way, check with whoever does your testing software to see whether their 401a4 module has an option to use anything other than 100% of the taxable wage base as the integration level when testing on contributions.  Further, test a simple case with two participants, one with comp in excess of the SSWB and an HCE, the other with comp less than the SSWB and an NHCE.  Run it with "everybody  in their own group". Allocate an amount that is consistent with a safe harbor formula using something lower than 100% of the SSWB as the integration level. Run the a4 test. Try to make it pass.    

Or you could just read the a4 regs again and find that when computing contribution rates the use of 100% of the SSWB is required when imputing permitted disparity.

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On 1/24/2020 at 4:55 PM, Bri said:

But in the case above, the plan doesn't allocate on a formula.  Each participant is assigned a single contribution amount (that just happens to mimic an integrated formula).  So that's the language/technicality I get hung up on.  The plan is allocating based on a list of individual names and amounts directed by the Administrator, rather than a formula (which makes it feel less "safe" of a harbor in my mind).

Honestly, I'm not going for anything beyond a semantics argument, I suppose.

I think you have stated it quite well, and it isn't really a semantics argument.  You can mimic a SH allocation but can't claim a SH - the allocation must be general tested, and it can fail.  

Ed Snyder

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On 1/25/2020 at 2:01 PM, Mike Preston said:

I don't see where anybody is talking -11g in this thread.  That just confuses things.  The fact is that the permitted disparity safe harbors are only available to structures that satisfy the permitted disparity safe harbors in connection with a written formula.  This thread has been talking about "a cross tested" plan, which everybody assumes mean everybody in their own group and that there is no formula of any kind and that there is no need for an -11g amendment of any kind.

To confirm that the entire industry thinks it works this way, check with whoever does your testing software to see whether their 401a4 module has an option to use anything other than 100% of the taxable wage base as the integration level when testing on contributions.  Further, test a simple case with two participants, one with comp in excess of the SSWB and an HCE, the other with comp less than the SSWB and an NHCE.  Run it with "everybody  in their own group". Allocate an amount that is consistent with a safe harbor formula using something lower than 100% of the SSWB as the integration level. Run the a4 test. Try to make it pass.    

Or you could just read the a4 regs again and find that when computing contribution rates the use of 100% of the SSWB is required when imputing permitted disparity.

I have to admit I was not contemplating a plan with each person in their own group.  I thought (without good reason) that we were talking about a plan (think PS) with a regular allocation in the plan (think, for example, super integrated) and that is what we had to use the -11g for.  I probably need to go back and re-read all the responses, but what is missing from the original post is what exactly IS the current design of the allocation? Is every person in their own group?

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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If the employer (who currently has a cross-tested formula) is wanting to instead allocate the profit sharing contribution using an integrated formula with something other than the full SSTWB as the integration level, then an 11-g corrective amendment may be used to  conform the plan to one of the safe harbors (including integration) .  However, without the 11-g amendment, the general testing must be performed using full SSTWB, as noted above. 

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57 minutes ago, AKconsult said:

If the employer (who currently has a cross-tested formula) is wanting to instead allocate the profit sharing contribution using an integrated formula with something other than the full SSTWB as the integration level, then an 11-g corrective amendment may be used to  conform the plan to one of the safe harbors (including integration) .  However, without the 11-g amendment, the general testing must be performed using full SSTWB, as noted above. 

I'm not sure what you are trying to say but I dispute what you did say.  I don't believe that an 11-g amendment can be used to conform a plan to a safe harbor allocation - I think you are saying that you could use an 11-g amendment to say "we are changing the allocation formula to integrated at 81% of the TWB."  No.  An 11-g amendment could be used to increase allocations (that may mimic some kind of formula) to pass the general test (presumably on a contributions basis).  (And let's all stop saying "cross-tested" when we mean "general tested.")

Ed Snyder

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