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4-Tier Integrated PS... Must use 100% TWB?


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We have a debate in the office.  A 401(k) plan with an Integrated (4-tier) PS allocation @ 100% TWB.  (Excerpts from AA and BPD below.)   Fact:  The MAX SS integration is 100% TWB.  Q:  Can the plan choose to make less than 100% TWB (like 46% TWB) as long as the allocation is applied in the same non-discriminatory manner?  

Someone said it can be done & someone else said it cannot be done.  My brain hurts, so I am no longer sure.  Anyone else have some solid experience on this?

Per AA,

"...b) [X] Permitted disparity. In accordance with the permitted disparity allocation provisions of Section 3.04(B)(2), under which the
following permitted disparity formula and definition of "Excess Compensation" apply:
Formula (select one of (1), (2), or (3)):
(1) [ ] Two-tiered.
(2) [X] Four-tiered.
(3) [ ] Two-tiered, except that the four-tiered formula will apply in any Plan Year for which the Plan is top-heavy.
Excess Compensation. For purposes of Section 3.04(B)(2), "Excess Compensation" means Compensation in excess of the
integration level provided below (select one of (4) or (5)):
(4) [X] Percentage amount. 100% (not exceeding 100%) of the Taxable Wage Base in effect on the first day of the Plan
Year, rounded to the next highest $ (not exceeding the Taxable Wage Base)..."

Per the base plan doc...

"...(2) Permitted disparity allocation formula. The Employer in its Adoption Agreement may elect a two-tiered
or a four-tiered permitted disparity formula, providing allocations described in (a) or (b) below, respectively. The
Employer also may elect a two-tiered permitted disparity formula which changes to four-tiered in any Plan Year in
which the Plan is top-heavy.
(a) Two-tiered formula.
(i) Tier one. Under the first tier, the Plan Administrator will allocate the Employer
Contributions for a Plan Year in the same ratio that each Participant's Compensation plus
Excess Compensation (as the Employer defines that term in its Adoption Agreement) for the
Plan Year bears to the total Compensation plus Excess Compensation of all Participants for the
Plan Year. The allocation under this first tier, as a percentage of each Participant's
Compensation plus Excess Compensation, must not exceed the applicable percentage (5.7%,
5.4%, or 4.3%) listed under Section 3.04(B)(2)(c).
(ii) Tier two. Under the second tier, the Plan Administrator will allocate any remaining
Employer Contributions for a Plan Year in the same ratio that each Participant's Compensation
for the Plan Year bears to the total Compensation of all Participants for the Plan Year.
(b) Four-tiered formula.
(i) Tier one. Under the first tier, the Plan Administrator will allocate the Employer
Contributions for a Plan Year in the same ratio that each Participant's Compensation for the
Plan Year bears to the total Compensation of all Participants for the Plan Year, but not
exceeding 3% of each Participant's Compensation. Solely for purposes of this first tier
allocation, a "Participant" means, in addition to any Participant who satisfies the allocation
conditions of Section 3.06 for the Plan Year, any other Participant entitled to a Top-Heavy
Minimum Allocation. For purposes of both first tier and second tier allocations under this
Section 3.04(B)(2)(b), Compensation and Excess Compensation refer to Compensation as
determined under Section 10.06(A).
(ii) Tier two. Under the second tier, the Plan Administrator will allocate the Employer
Contributions for a Plan Year in the same ratio that each Participant's Excess Compensation
(as the Employer defines that term in its Adoption Agreement) for the Plan Year bears to the
total Excess Compensation of all Participants for the Plan Year, but not exceeding 3% of each
Participant's Excess Compensation.
(iii) Tier three. Under the third tier, the Plan Administrator will allocate the Employer
Contributions for a Plan Year in the same ratio that each Participant's Compensation plus
Excess Compensation for the Plan Year bears to the total Compensation plus Excess
Compensation of all Participants for the Plan Year. The allocation under this third tier, as a
percentage of each Participant's Compensation plus Excess Compensation, must not exceed
the applicable percentage (2.7%, 2.4%, or 1.3%) listed under Section 3.04(B)(2)(c).
(iv) Tier four. Under the fourth tier, the Plan Administrator will allocate any remaining
Employer Contributions for a Plan Year in the same ratio that each Participant's Compensation
for the Plan Year bears to the total Compensation of all Participants for the Plan Year.

(c) Maximum disparity table. For purposes of the permitted disparity allocation formulas under

For this purpose, the Taxable Wage Base is the contribution and benefit base under Section 230 of the
Social Security Act in effect at the beginning of the Plan Year. The integration level is the uniform amount
specified in the Employer's Adoption Agreement..."

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Are you asking if the plan can use any other integration level below 100%?  That's certainly fine.  It looks as though your answer on (b)(4) of the adoption agreement you snipped in here shows an election explicitly for 100 (before the parenthetical note that it's not to exceed 100%).

If you choose 46% of the TWB, then your tier three level is 1.3% as the "applicable percentage" as listed under Section 3.04(B)(2)(c), as I type the text from your snip.  It's 2.7 if you choose 100%, or something less than 20%.  It's 2.4 if you're between 80 and 100, and 1.3 if you're between 20 and 80% of the TWB.

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I agree with Bri. You have to follow the formula in the document.

Of course, the formula can be amended, but watch out for anti-cutback issues. Most likely you can amend it for the current year if there is a last day requirement, or for the next plan year if there is no last day requirement.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Even if you do not have last day rule, can be amended prior to accrual of 1000 hours of service, assuming you have one.

TWB %/level must be spelled out on the AA.

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16 hours ago, Jakyasar said:

Even if you do not have last day rule, can be amended prior to accrual of 1000 hours of service, assuming you have one.

Have one what?

Side note, if this is for 2022, almost assuredly someone is getting 1,000th hour this week sometime, if not last week.)

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Similar office argument, how do you interpret the phrase, "rounded to the next highest $1", if the % doesn't result in any rounding?  For example, AA election is 80%, TWB for '22 would be $117,600.  Office leader argued that it should be interpreted as $117,601 so as to use the 5.7% integration level.  My reply was that it divides evenly so there is nothing to round, you have to use at least 80.01% in your document.  I saw the rounding language as anachronistic to the covered compensation table language. 

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I agree with you Nate - it's also why I used to like AAs putting the integration level at "80% plus $1" even though you'd have to manually calculate/override that number each year in the admin software.

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