Must Plan Document contain a Safe Harbor allocation formula in order t

[Guest Dave Danziger]

In case the full text of my question is cut off in the header for this post, let me restate it here: Must a plan contain a written formula in order to make integrated allocations at less than 100% of the SSTWB?

Background: Our New Comparability plan document used to contain "Fail Safe Self-Correction" language. That is, the document specified how EBARs were to be calculated, and how an initial allocation would be adjusted if it failed the General Test for Non-Discrimination.

Following recent trends, our GUST document is now devoid of testing and self-correction language. (Our allocation provisions also now allow for contributions to be declared separately for each Category (or Tier), therby reducing the rigidity with which a contribuiton has to be allocated. We thought this would give us the freedom, in years when demographic changes made cross-testing unappealing, to declare in integrated allocation, and satisy non-discirmination requirements by using the (a)(4) Safe Harbor rules for DC plans.

The reason we'd like to use the Safe Harbor under (a)(4) (as opposed to the General Test) is that we'd like to be able to use an integration level lower than 100% of the SSTWB. This is permitted under the 401(l) rules referenced under the Safe Harbor rules, but appears not to be allowed when imputing disparity under the General Test.

Our question is this: Must the plan document be written as a 'design based safe harbor' in order to use the safe harbor rules? Our concern stems from the fact that the safe harbor regs, at 1.401(a)(4)-2(B)(ii) read: "Permitted disparity. If a plan satisfies section 401(l) in form...(it will) not cause the plan to fail to satisfy this paragraph (B)(2)." We're concerned that the term, "in form", means that the form of the document must specify the manner in which 401(l) will be satisfied. Since our document is silent in terms of how it handles 'permitted disparity' does that mean we can only impute disparity at 100% of the Wage Base under the rules in 1.401(a)(4)-7? If that is so, then plans that would have passed the Safe Harbor using 401(l), could end up flunking under the General Test.

Thank you in advance for any replies. Thanks also to Tom Poje for being a superb moderator. Does our concern leave you worried Tom?

[Tom Poje]

Dave:

thanks for the comments

actually, at the moment my only concern is reviewing/editing material for the Coverage and Nondiscrimination Answer Book.

Ugh. Open mouth, insert foot. Once a sucker always a sucker.

I guess my question would be why you are even running The General Test if the plan is safe harbor? or maybe I am missing something. My mind is like jello at the moment.

[mwyatt]

A little clarification on your plan document. Most of the language I've seen for the class allocation method has the Employer providing written instructions to the Trustee of how much to contribute to each Class; in turn the contribution will be allocated among each Class on the basis of comp to total comp within the Class.

Assuming that you have this type of language, I don't exactly see how you could do an integrated allocation staying within the confines of allocating on comp within the Class. I would think that you would have to amend your document if you wanted to change the allocation method.

Now, you could run your desired integrated allocation and try to match this up approximately (assuming that your participants who would receive a share of the integrated allocation were unique to a given class). An approximation, but would probably work. I don't think that you could call this a "safe harbor" in end result, but...

Use the General Test on allocation w/ imputed disparity (instead of Cross-Testing) and you would most likely have no problem passing.

Hope this is of help. What does your plan language say for the allocation method?

[Blinky the 3-eyed Fish]

Dave, to clarify, are you saying the plan allocations are within a designed base safe harbor of 401(l), but the language is not a designed base safe harbor?

If that is indeed the problem, then no, you cannot rely on the safe harbor pass on nondiscrimination, but must pass the general test.

[Mike Preston]

By definition, if an allocation conforms to the 401(l) rules, it will pass the general test on a contributions basis, with only one rate group. Or am I misinterpreting what you are trying to say, Blinky?

Now that I've read the original post in more detail, I agree with Blinky. I see nothing in the general test that allows the permitted disparity imputation on anything other than 100% of the SSWB. In fact, the language makes it pretty clear that you are stuck at the 100% of SSWB for imputation.

[Guest Dave Danziger]

If your book is on par with the Coverage materials you presented at ASPA's annual meeting last October, I'd like to buy a copy!

In reply to your question, why am I general testing at all, I would note that I may have caused some confusion by stating the opening question too narrowly. What I'm starting with is a "Multi-Category" Plan document (not a design-based safe harbor document). It allows the employer to declare a separate contribution for each category. Under ideal circumstances, the contribution will be made in a 'New Comparability' manner; i.e., maximum to preferred Category, with minimum to all others, and demonstrated as non-discriminatory using cross-testing under the General Test. (In fact, Schedule Q on the IRS submission indicates that the plan is general tested.)

Given that our clients tend to be small employers, a little turnover can have a big impact on testing results. In the past, when demographics went bad, we would have to amend the plan to an integrated formula. (That would make it a documented, design-based, safe harbor plan.)

Under our new GUST approved document, the allocation opportunities are much more open ended (i.e., we won't need to amend the plan in order to make the allocation). Instead, we will be able to declare a contribution on an integrated basis (at 81% of the SSTWB). However, in order to demonstrate satisfaction of (a)(4), I've got to use the Safe Harbor for non-discrimination because I'm using an integration level lower than 100% of the wage base.

My concern continues to be that I may not able to use the safe harbor because, "in form", the plan does not expressly require a safe harbor allocation. If my concern is well-founded, the upshot (in the case of client whose demographics shift sufficiently to make cross-testing unappealing) may be that I still have to amend the plan in order to integrate at 81% of the SSTWB. The only alternative by which I could avoid an amendment would be to integrate at 100% of the wage base. I can live with any of the consequences, I would just like to know what is, and what is not, available without a plan amendment.

Does that help?

[AndyH]

If you represented the plan to be general tested on the IRS submission, why would you be concerned as to whether the plan meets safe harbor status in form?

I can understand a concern about the reverse, but I don't see the downside to a (potentially) general tested plan meeting the safe harbor testing standards.

This interests me because I purchased a detailed "cross testing" document outline by Sal Tripodi where he mentions that one of the nice things about having a document design as you have indicated is that in any particular year, the employer could, by properly designating the right contribution levels, provide even allocations and avoid the general test (if so motivated for whatever reason).

BTW (thanks Mike), I highly recommend the outline to all but the most advanced experts. Lots of good ideas. I don't have the link with me, but it's TRI Pension Services.

And, I second your thanks to Tom for his great contributions to this Board, as well as (more recently) Mike's.

[Tom Poje]

Except for the work involved, why would you be afraid of the general test?

In my time at software support and now back working in the 'unreal' world of pensions, I have heard it a number of times that 'the general test fails' in the situation described above.

In all honesty, I have yet to see it fail, in any of the cases.

The problem is that most software defaults to cross testing a DC plan. And since the HCEs in those cases are young the plan fails.

However, if you were to test on an allocation basis the plan would pass (unless you have a bunch of ees who didn't receive a contribution due to last day provision)

consider a simple case of a comp to comp allocation. for the average ben % test all ees will have the same %. but since you only need 70% to pass the test, 3 of 10 NHCE could get zippo and still pass.

If the plan is fully integrated at 5.7% and you impute disparity, everyone ends up with the same % as well. Try it! It is a great way to verify if the contribution is correct!

my experience is that people tend to forget that you can test either by allocation or accrual method.

[Guest Chamelnix]

Let me give an example of what I think Dave is asking:

Owner: Comp = $170,000

Sole Employee: Comp=$30,000

Plan says owners are one class, employees another. Contribution is allocated pro rata comp to each class. Sole employee is older than owner (in the past there were younger employees that made cross-testing appealing).

For 2001, Dave would like to allocate contribution as if the plan were integrated at 81% of the SSTWB.

Owner: Allocation = $14,843 (5.4% of pay plus 5.4% of pay in excess of $65,124.

Employee: Allocation = $1,620 (5.4% of pay).

This allocation fails the general test on a contributions basis even after imputing permitted disparity although a safe harbor plan could have provided this allocation.

Dave, I think the answer is you cannot give the allocation above because of exactly the reg you quoted. Since your plan does not have the permitted disparity allocation in it, you must satisfy the general test in some form. Hope I understood your question correctly.

[Guest Dave Danziger]

Thank you very much. You've translated my questions perfectly. Unfortunately, you've also confirmed my concerns. I'm sure we'll find a way to deal with them. Again, thank you very much.