"Definitely Determinable" Requirement and Allocation Formula

[Christine Roberts]

Must a plan document specify the percentage allocation for each rate group, or a maximum which the allocation does not exceed, in order to satisfy the "definitely determinable" benefit formula rule?

Is the answer to this question changed in any way by the introduction of the gateway testing rules?

[Guest earthy]

Yes, it must. Under Treas. Reg. 1.401(a)(4)-3©(3)(i). Each rate group is treated as if it were a "separate plan" that benefits only those employees included in the rate group for the plan year.

[Tom Poje]

the document should describe the different classes or groups, and then generally will specify the allocation will be comp to comp in each group.

e.g.

Section

﷡﷡﷡﷡﷡ For each Plan Year, the Employer shall contribute to the Plan for each Class of

participants such amount as shall be determined by the Employer. The Employer

shall notify the Trustee, in writing, of the amount of contributions for each Class.

﷡﷡﷡﷡﷡ (1) Each Participant shall be assigned to a Class of participants as follows:

Class A ﷡﷡﷡﷡﷡

Class B all others

(2) The contribution made by the Employer for Class A shall be allocated to all

Class A Participants in the same proportion that each Class A Participant’s

Compensation bears to the total Compensation of all Class A Participants.

(3) The contribution made by the Employer for Class B shall be allocated to all

Class B Participants in the same proportion that each Class B Participant’s

Compensation bears to the total Compensation of all Class B Participants.

﷡﷡﷡﷡﷡ As of each Anniversary Date any amounts which became Forfeitures since the last

Anniversary Date shall first be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with Section ﷡﷡﷡﷡﷡ .The remaining Forfeitures, if any, shall be added to any Employer contributions made to each Class of participants pursuant to Section ﷡﷡﷡﷡﷡in the proportion that the contribution made to each Class bears to the total contributions made to all Classes and allocated in the same manner as such Employer contributions are allocated. Provided, however, that in the event the allocation of such Forfeitures provided herein shall cause the “annual addition” (as defined in Section ﷡﷡﷡﷡﷡) to any Participant’s Account to exceed the amount allowable by the Code, the excess shall be reallocated in accordance with Section ﷡﷡﷡﷡﷡.

then every year a notice similar to the following should be provided:

﷡﷡﷡﷡﷡

﷡﷡﷡﷡﷡

BE IT RESOLVED, for the Plan Year ended ﷡﷡﷡﷡﷡, the Corporation shall make a profit sharing contribution of $﷡﷡﷡﷡﷡, which shall be allocated as follows:

Class Amount

﷡﷡﷡﷡﷡ $ ﷡﷡﷡﷡﷡

﷡﷡﷡﷡﷡ $ ﷡﷡﷡﷡﷡

﷡﷡﷡﷡﷡ $ ﷡﷡﷡﷡﷡

﷡﷡﷡﷡﷡ $ ﷡﷡﷡﷡﷡

BE IT FURTHER RESOLVED , that the officers of the Corporation and the Trustees are authorized to take any action necessary to implement this Resolution.

Certificate

I, __________________, the duly elected, qualified and acting Secretary of ﷡﷡﷡﷡﷡, hereby certify that the foregoing is a true copy of the Resolution adopted by the Board of Directors on the ____ day of _____________, ﷡﷡﷡﷡﷡

_______________________________

Secretary

[AndyH]

To elaborate on Tom's comments, the theory is that if you can have multiple profit sharing plans all with discretionary formulas, you should be able to have multiple "plans" within one document.

But, as I'm sure Tom knows, many cross tested documents do contain the allocation formulas, or at least relative allocation formulas. I agree that the approach that Tom outlined is usually preferable, but the fact remains that many plans are not written this way.

I've been trying to get a feel for what percentage of cross tested plans do and do not specify the individual relative factors and have not been able to do so. I know Corbel's volume submitter uses classes only. I don't know how the other national document providers address this, but I would like to know.

I asked several business owners at ASPA how their plans were written in this manner and received mostly "I'm not sure. Good question." or "We'll have to see how that shakes out", the latter one from a particularly prominent ASPA actuary.

So, I'd love to encourage some discussion of this issue and how others are writing their cross tested plans.

[Christine Roberts]

Thank you for the useful comments. I am wondering if, presuming the contribution percentages are specified in an annual board resolution (or the equivalent for a non-corporate entity), would it also be possible to specify the interest rate assumption and mortality table, applicable for that year?

Is it even likely that typical changes in plan demographics would require use of different assumptions, in order to pass nondiscrimination testing?

[AndyH]

You certainly could specify the assumptions and/or methodology used, but you do not have to and probably should not for the reasons you've described, that they may change each year.

In practice, nobody does this, because there is no need or benefit to doing so.

But, some documents do have specified assumptions and/or methodology within the document, even though it is generally recognized that it is neither necessary or advantageous to do so.