Definite predetermined allocation formula

[Guest AJJ-EB]

An employer has a 401(k) profit sharing plan and has decided to make employer nonelective contributions every pay period (bi-weekly). The employer also wants to allocate the contributions to the employees' accounts when contributed. The employer wants to have the discretion to increase contributions or stop contributions anytime during the year. I am now amending the plan to try to meet the employer's request, but am running into the problem of having to define a predetermined definite allocation formula. The problem is that if the employer contributes 2% of compensation per employee based on the employee's compensation for that payroll period, the employer also wants the 2% allocated to the employee's account. But next month, the employer may decide to make any contributions, then there would not be an allocation. Has anyone come accross a similar situtation? How have you dealt with it?

[Medusa]

I do not think you need to be that specific. Our volume submitter plan, for example, says: Employer Matching Contributions may be made in an amount up to 100% of a Participant's Elective Deferral (or such larger amount as the Employer may determine) made during the period for which the Matching Contribution is made. The Employer may limit the amount contributed to a specified percentage of Compensation deferred.

[Guest]

I would run far away. That type of client is not worth the grief it will cause you. That type of set up is begging for problems. Is there a last day rule or hours requirement...if so then you will have to yank $ out of peoples account at year end. nothing but confusion.

It also sounds like you are going to have to do nondiscrimination testing as well. for example, lets say the owner makes $10,000 a month but in June makes $50,000 with bonus. Each month he puts in 1%, but June puts in 5%. maybe you won't have problems, but, as I said, I would give serious consideration about whether it is worth the grief that may loom down the road.

[MWeddell]

I don't perceive a problem here, other than the plan won't meet a 401(a)(4) safe harbor and hence will require general testing. Profit sharing contributions, if any, will be allocated for a pay period in proportion to participants' compensation during that pay period. Sounds like a definite allocation formula to me. The employer can stop and start and change the amount contributed each pay period but is not changing the allocation formula.

[Medusa]

Sorry, I misread the question originally. I agree with MWeddell.

[Guest lforesz]

Hi,

This question is in regards to whether or not an employer can design rate groups to allow for discretion by Participants each year as to which rate group he/she wants to be in. For example, can we design one group to be partners who elect to contribute the maximum 415 amount and a second group to be partners who elect to contribute $5,000 less than the maximum 415 amount? We obviously have partners who don't want to be told what to do and want to be able to decide each year. Do we have to design the plan so that each partner is a separate rate group in order to allow this individual discretion?

If anyone knows, please help.

Thanks

[Kirk Maldonado]

MWeddell:

Why won't the plan satisfy Section 401(a)(4)? Everybody gets the same percentage of pay for each payroll period. Are you saying that Section 401(a)(4) has to be applied on a plan year basis?

[KJohnson]

Kirk

I think to meet a safe harbor it must be on a plan year basis 1.401(a)(4)-2(B)

[MWeddell]

Kirk,

The proposed allocation method might satisfy a 401(a)(4) general test.

I was merely asserting that it will not satisfy the 401(a)(4) safe harbor and will require general testing. Treas. Reg. 1.401(a)(4)-2(B)(2)(i) provides a safe harbor if each employee is allocated the same percentage of plan year compensation but doesn't provide a safe harbor if each employee is allocated the safe percentage of payroll period compensation. None of the stuff in Treas. Reg. 1.401(a)(4)-2(B)(4) says that we can ignore the payroll period allocation method.

Let me know if that doesn't clarify it yet.

-- Michael

[KJohnson]

Just as an aside, with regard to changing discretionary matching contributions mid year, I received the following from a prototype sponsor when we were discussiing whether such a change was permissible:

Two IRS agents from the Cincinnati Key District Office verified that a "discretionary" match CANNOT be changed during the plan year. The reason is because changing a discretionary match violates Treasury Regulation 1.401-1(B)(1)(ii) that states a profit sharing plan must provide a definite "predetermined" formula for allocating the contributions made to the plan. Thus, a "discretionary" match must be the same percentage for the WHOLE plan year.

They made it very clear that if the employer intends to change his matching percentage during a plan year, the matching formulas MUST be stated in the plan and the plan amended each time the formula is changed