Too Creative Design?

[Jed Macy]

Will this plan design be qualified? It has 5 possible sources of contributions.

1 - Safe harbor 401(k) deferrals

2 - 3% nonforfeitable employer contribution to a Profit Sharing A Account

3 - Discretionary employer contribution to Profit Sharing B Account allocated solely on pay

4 - Discretionary employer contribution to Profit Sharing C Account allocated solely on pay but integrated

5 - Discretionary employer contribution to Profit Sharing D Account allocated based on age and pay, not integrated

For each year, the employer might declare contributions to any one or more of Profit Sharing B, C or D Accounts.

[actuarysmith]

You are getting too carried away. Simply create a cross tested / new-comparability profit sharing plan. Define groups A,B, and/or C, etc.

You can always allocate groups A,B,C,etc. accross pay, or in an integrated fashion. You do not have resort to cross-testing even though your document allows it.

In a year in which the employer wants to weight the allocation based upon age and pay, you are already set up for that by virtue of having defined you allocation groups. You will just have to be able to run the appropriate non-discrim testing results and make sure you can pass.

Remember that you can include the 3% non-elective safe harbor contributions as part of this testing.

[Jed Macy]

The employer I have in mind for this plan design is one doc and 5 nurses. The doc wants to cover all 5 nurses, but wants the flexibility to allocate differently in different years without amending the document. For now he has an employee much older than himself and therefore an age-weighted allocation is too costly; but when she retires, it will most likely be his preferred allocation method.

I figured that putting both allocation methods in the document now as alternate contribution types would meet his need.

If I understand what you propose, it would involve defining at least 2 groups of participants to get allocations based on different methods. However, both groups would be the same participants in the case of this employer.

Thanks for your thoughts.

[MWeddell]

Yes, I believe what you've suggested, Jed, is permissable. About 5 years or so ago, the IRS used to object to multiple contribution allocation formulas because if the sponsor can choose which profit-sharing account to fund, in essence there is not a definite allocation formula. However, the IRS rescinded its field advice memorandum and you should be able to obtain a favorable determination letter on the plan design you propose.

[actuarysmith]

Group A would be for Docs.

Group B would be for all other employees.

Allocating groups A&B accross pay would work.

Integrating the contribution would work.

In a year where the doctor wanted the maximum contribution with minimal outlay, allocate 5% of pay to group B and maximum amount allowable to group A (might be as high as 40% of pay or so, depeding upon the age and income level of the doc(s))l.

I read MWeddell's comments, but I still feel strongly that you do not need to get your document so complicated and convoluted when this approach will clearly work.

[KJohnson]

MWEDDELL,

Could a calendar year plan that provides for a discretionary contribution with a percentage of comp allocation formula and a 500 hour rule for an allocation amend its plan now and provide for a second cross-tested discretionary allocation and then simply decide not to fund the "orginal" allocation method.

It would seem that you could not take the "old" allocation method away for this year under Technical Advice Memorandum 9735001. However, it would seem that you could add a new allocation method, keep the old, and then simply not fund it.

This seems to work logically, but I am not sure whether it would be attacked as an end rund around the TAM.

[IRC401]

The MD doesn't have the option of simply depositing money and then deciding how to allocate it. He will need to amend the plan every year to specify the allocation formula.

The IRS will take the position that the resolution needs to be adopted before any participant meets the service requirements for an allocation for the year.

Considering a typical MD's attention to detail on these matters, implementing the formula is asking for trouble.

If 4 of the 5 nurses are younger than the MD, he should be able to set up an allocation formula that gets him where he wants to be. How much does he expect to want to vary p/s each year per nurse. He would probably be better off paying cash bonuses.

[david rigby]

I agree with the comments about amending the plan as needed. Usually a bad idea to try to anticipate all possible permutations in one document. What's wrong with doing a one-page amendment each year, after you have identified the cross-tested formula you want to use? Seems a lot safer than trying to do it all at once.

[MWeddell]

Yes to KJohnson's question. While the IRS does not allow one to amend an allocation formula after 1 or more employees have satisfied the conditions necessary to receive that year's allocation of any contributions, one can add in a separate allocation formula. On the rare occasion when I've done this (e.g. adding bottom-up QNECs in addition to more normal QNEC allocation formula after a plan year has already ended), I've defined a separate contribution source in the plan document with its own allocation formula. Perhaps I'm being more cautious than needed in that regard.

The IRS in 1996 rescinded an 1994 field directive that caused problems with multiple allocation formulas for employer nonmatching contributions and a 1998 IRS legal memorandum clarified that the 1994 field directive indeed was completly rescinded.