Change in Allocation Formula

[Guest amm19]

A plan with a 1,000 hours and last day requirements to receive an allocation of discretionary contributions has inquired about changing their formula for the calendar year 2002. I believe this is too late in the plan year to do so as participants have accrued the benefit upon reaching 1,000 hours of service.

The CPA argues that the last day requirement supercedes this and they have until December 30, 2002 to make a change in their allocation formula (i.e. from prorata to integrated). I still disagree.

What are your thoughts?

Thanks!

[KJohnson]

LOOK AT THE FOLLOWING--I BELIEVE THE CPA IS CORRECT.

http://www.reish.com/practice_areas/Techni...ps/IRStip16.cfm

[2muchstress]

Without reading the link provided by Katherine, it is my understanding that a benefit would not accrue until the last day of the year, due to the last day requirement.

This is the way I have always practiced, and have yet to run into problems because of it.

[Guest amm19]

From what I am finding in the article and with other TPAs the practice has been to use the last day requirement. However, what I intend to do is compare the current allocation formula versus the proposed formula to see if any NHCEs are significantly affected. If there are any participants (NHCEs) that drop, I will strongly suggest that the HCEs fund to the level that would be equated with what the plan would have funded under the old formula.

[Mike Preston]

Your position is not supportable. You should tell the client that you are taking a "worst case" position and that they are likely to get a different opinion if they talk to anybody else.

[KJohnson]

Generally agree with M. Preston.

However, the one thing, however, to watch out for is if the Plan waived the last day /1000 hour requirement for anyone who terminated because of death, retirement or disability. If the Plan contains this language then anyone who falls into this cagegory has already accrued an allocation under the old formula for the year.

[Mike Preston]

Agreed.

[Guest merlin]

A further question for KJohnson:

If there is a participant in the death/retirement/disability category, does that require protection only of his/her allocation basis,or does it preclude any chamge for all?

[KJohnson]

I have always operated based on the assumption that only the participant who falls withing the death/retriement/disability category would be entitled to an allocaiton under the "old method"

Also, although I haven't gone back to look at them, I believe that the 401(a)(4) regulations say that an allocation formula that gives the better of two safe harbor allocation formulas may still be a safe harbor allocation formula. I believe that there are some "availability" constraints to this rule but if you only have an NHCE in the death/retirement/disability category, I would think that you would still be in a safe harbor allocation.