Employer Allocation Formula

[Guest amm19]

We are restating a plan which is a 401k profit sharing plan. In reviewing material from the prior TPA there is an interesting twist to the allocation formula for non-elective contributions. The language references both new comparability and integrated formulas with a footnote stating "the annual Employer nonelective contribution will be allocated in the manner specified in either method 1 (integrated) or method 2 (cross test) whichever method produces the highest allocation rate for the HCE with the highest compensation. There is no individual determination letter received by the IRS for the plan. Is this permissible and if so, how? Thanks!

[austin3515]

Good question. I have no idea, but I'll take a stab.

The only requirement I know of is that under a DC Plan, the allocation has to be determinable. I.e., based on straight compensation, integrated compensation etc.

This plan takes an interesting twist on that, because truly no matter what, anyone should be able to determine what the allocation rate is in any given year. So it may not fail to satisfy that requirement.

Then of course, it would have to satisfy all nondiscrimination requirements regardless (410(B), 401(a)4, etc.).

One last thought is that perhaps by design the Plan discriminates in favor of HCE's because it's geared to benefit the highest paid employee in the most beneficial way. That seems to be at least one potential interpretation, and it would obviously create a problem...

I'd get the letter!

[Mike Preston]

Sure it can be done. Why not? The only issues, as pointed out, are whether it is definitely determinable and whether it passes testing. If the integration percentage is not at the 5.7% level, then if very well might fail. It depends on whether there are any other plans and/or whether accrued to date testing works out better than annual testing.

With that said, unless the document lays out a lot of what it means to determine how cross testing is to be performed, my bet is that it is not definitely determinable.

[austin3515]

Mike -

Can you expand on what the Plan doc should should say for cross testing to be definitley determinable? Do you mean in terms of defining who would fall into each rate group?

[Mike Preston]

Yes, and no. That is, I can do so generically, but don't have time to do so in detail. The IRS published a Field Service Memorandum on the issue of definitely determinable in a cross tested plan some years ago, before they were accepting discretionary groups in the document. In fact, the rescision of the Field Service Memorandum was the condition precedent to the IRS allowing groups in a plan document. Basically, you have to define precisely what method you are using to determine your cross-testing (accrued to date vs annual method, interest rate, mortality table, retirement age, normalization formula, etc., etc.). If you find a cross testing document from TRA with a Letter of Determination that should pretty much show you the type of language needed.

[austin3515]

Generic for you is detailed for me...

Thanks!