Imputing Permitted Disparity In a Safe Harbor 401(k) Plan With A Tiere

[Guest merlin]

In testing a tiered allocation in a safe harbor 401(k) plan you cannot impute disparity on the deferrals or the 3% safe harbor contribution, only on the "pure" employer contribution. For a participant whose only employer contribution is the safe harbor (forget the 2002 gateway) when you calculate the adjusted EBARs, his A-rate = 2 x unadjusted EBAR,based on the 3% safe harbor, and his B-rate = unadjusted EBAR + permitted disparity factor. The pdf = 0 so his B- rate = unadjusted EBAR.Or do you pull the safe harbor contribution out entirely which leaves A-rate = B-rate =0 ?

[Tom Poje]

you are allowed to include the safe harbor, if testing on an allocation basis I would say you are at 3%.

I would assume if you used the gateway then you would have

3% safe harbor + 2%(ps contrib) + 2%(impute disparity)

[Guest merlin]

Sorry, it's not registering. Let me give you specifics. I'm looking at a 401(k) plan that uses the 3% safe harbor contribution. The employer PS contribution is allocated comp/comp by class:

Class A = Owners allocation = max

Class B = managers allocation = 8%

Class C= Staff allocation = 3%

In all instances the first 3% is the s/h.

Nhce #1 age 40 ,testing age 65, SSRA 66.comp = $ 43,000, covered comp=66960,allocation = 3% = $1290, deferral =$3010. Her Equivalent Benefit = 1123/yr, unadjusted EBAR for 401(a)(4) = 2.612 based on 8-1/2%.1983 IAM.How are her A- and B-rates calculated?

Hce #1 age49, testing age 65, SSRA 66. Comp = $170,000,covered comp =68232, allocation = 24500, deferral = 10500. EB = 10236, EBAR =6.021. How are C- and D-rates calc'd?

Thank you for your help!

[Tom Poje]

Merlin (I assume the magician):

I hope you will bear with me if I use an example using dc numbers.

ee receives 3% SHNEC and a 2.8% profit sharing as well.

Impute disparity on the profit sharing 2* 2.8 = 5.6%, plus the 3% SHNEC for an adjusted allocation rate of 8.6%

an ee with comp of 100,000 who received a 2.8% base plus 2.8% integrated as well as the SHNEC would be:

...an adjusted allocation rate of 6.72. this is added to the 3% unadjusted allocation rate attributable to the SHNEC.

the Adjusted allocation rate (after imputing permitted disparity) = 9.72%

...or if cross tested, then..."for each employee, permitted disparity may be adjusted only on the separate EBAR attributable to the additional nonelective contribution. The adjusted EBAR would then be added to the EBAR attributable to the SHNEC for the total EBAR used in the test."

This is from The ERISA Outline Book 11.359. 2001 edition.

maybe put another way...

old rules said you had the lesser of the A rate or B rate.

now you have the (lesser of the A rate or B rate) plus the SHNEC

[Guest merlin]

Applying your directions to my sample participants:

Nhce #1, unadjusted EBAR = 2.612, due totally froe SHNEC (I like the acronym-I hope it catches on) so her A-rate=o= her B-rate Her total adjusted rate = 2.612

Hce#1,total allocation = 24500, of which 5100 comes from SHNEC and 19400 comes from NEC. EBARs are 1.254 and 4.767 respectively.EB from NEC = 8105. C-rate=5.965,D-rate=5.049

D-rate + SHNEC EBAR=5.049+1.254=6.302. But I get the same numerical result if I calculate his EBARs using his total allocation, and go through the regular C-rate and D-rate calcs,i.e. whether I characterize the first 3% as safe harbor or not.

The same thing happens if I take one of the managers,who's getting an 8% allocation.In other words,it appears that when cross-testing a dc plan, the SHNEC is irrelevant for purposes of imputing disparity for anyone who's getting an allocation greater than the SHNEC.Can this be right? What have I done wrong?

As you can see,I'm not King Arthur's Merlin.More like the Sorcerer's Apprentice.Thanks again for your time.

[Tom Poje]

It 'can' be right. It all depends.

In the case of accruals I would suspect it to be the same most of the time.

here is why:

obviously a highly paid 'apprentice' like you would be different, but a lowly paid jester like myself would fall into the following category....

all kidding aside, a brilliant individual is not afraid to ask a seemingly 'obvious' question. you would be surprised how many people don't know why you arrive at the results you are getting.

the most permitted disparity will increase an individual

SSRA 67 is .65, SSRA 66 is .70 and SSRA 65 is .75.

So, if your profit sharing piece is .7 or more before adjsuting for disparity, then it doesn't matter whether you add the SHNEC before or after. for your employee who got SHNEC only, his profit sharing piece was 0, so it makes a difference whether you added the SHNEC before or after. your other individual was already above .70 so it didn't matter! and you have to be pretty old to end up with an EBAR less than .70.

consider what would happen if you tested on an alloaction basis.

The permitted disparity is 5.7%. Ouch! that means to get the full effect of disparity you have to give 5.7% profit sharing - and that doesn't include the SHNEC.

hope that helps.

[Guest merlin]

Got it, I've been doing this stuff a long time , but as Earl Weaver said,"It's what you learn after you know it all that counts." Thanks again, Tom

[Tom Poje]

fun stuff. a couple of posts back I used an example from the ERISA Outline Book, for an individual with comp of 100,000 and he received a 2.8% contribution (plus 2.8% integration above the wage base) plus a 3% SHNEC.

The concept of the example was correct (you get to impute on the 2.8% plus the 2.8% above the integration level and then add the SHNEC)

however, upon further review, my example contains an error.

I looked it up in the book and it used 2.8% of 100,000 and 5.7% above the wage base (5.7% * 23,800) to arrive at the results.

(It was a cross tested formula) In my haste to post an answer, I put down 2.8% plus 2.8% integrated.

My apologies for any confusion!

[Guest merlin]

No problem, Tom. Your conceptual explanation was more than sufficient.