Class of One Participant Allowed?

[chris]

What issues arise where cross-tested PSP has classes defined as a specific individual,e.g., Class A is Joe Jones, Class B is Jim Smith, etc...? Thanks for your help.

[Tom Poje]

no special issues I know of.

except when individuals talk to each other and one finds out that he got 15% contribution and another received 20%.

but that isn't a testing issue....

[actuarysmith]

I seem to recall hearing or reading somewhere (can't remember when or where) that if you had a group of one as a result of a general definition (such as division, pay grade, officer, owner, etc.) you were okay.

However, if you use an actual name so as to result in one person in the allocation group by definition, that the IRS could deem it to be a CODA. This would effectively reduce the maximum contribution potential from $40,000 to $11,000 or $12,000.

Does anybody else remember anything like this? or am I experiencing early alzheimers?

[chris]

Has anyone ever gotten a favorable determination letter with respect to such a plan?

[Mike Preston]

There are many, many cross-tested profit sharing plans that identify groups by naming individuals. If the IRS were to attempt to deem such an arrangement as a CODA there would be a tremendous backlash, I would think. If in doubt, submit! The next question would be whether, even with a letter, the IRS could claim it as an operational issue, rather than a form issue. In that case, if anyone is concerned about it, they could take steps to distance themselves from the CODA issue. For example. policies and procedures that result in a contribution determination that is subject to input from more than just the affected participant.

[Guest FredR]

I think the main problem is the 410(B) regs. They state thate a classification of a named individual is not a "non-discriminatory classification" so you would be unable to use the Average Benefits Test.

I don't see how you can come to a conclusion that there is a CODA when it is not the employee the creates the class, or the contribution. Since this is an employer determined contribution, I think this is safe. Remember the 401(k) regs used to say that partner match was deferral because of the income control issues, but that was repealed.

[Mike Preston]

The 410(B) issue relates solely to whether or not a plan satisfies the coverage rules. The coverage rules relate to eligibility. As long as eligibility is generic (like age 21 and 1 year of service) or, as you point out, based on reasonable classes, then the fact that the document provides for different levels of benefits for various participants is an issue solely for 401(a)(4). It is not an issue for 410(B). Hence, there is no restriction on the use of the Average Benefits Test if a plan has a tiered contribution formula, even if one, or many, of the tiers name a single individual.