Integrated formula in a cross-tested plan

[eilano]

There has been discussion on PIX and one of our employees attended Larry Deutsch's seminar last month regarding what to do if the xtesting does not pass. Can someone please clarify if we have a xtested document with Group One as owners and Group Two as staff, can we use straight integration if one of the employees receiving an integrated benefit is a NHCE and in the staff group. Do we still need to pass the general test? Thanks.

[AndyH]

The question is vague. What does the document say? Does the document allow you to produce allocations that are identical to that of an integrated safe harbor plan, or does it not? If it does, then you can do it and probably be done; if it does not, then that is another set of facts.

[dmb]

I always thought that regardless of the allocation formula in the document, if the contribution is allocated based on a safe harbor formula, testing wasn't necessary. Is that not true??

[AndyH]

Sure, that is true. But I'm not sure that was the question. The question may have been, if the formula in the document fails, can they simply revert to a safe harbor formula, i.e. ignore the document. No is the answer to that question (unless of course the document specifies that as the correction for a failure).

Or, if there are two people above the SS Wage base and in the same allocation class, and the allocations are discretionary, it may be possible to achieve the same result as if the plan was an integrated safe harbor.

So, I was trying to more clearly identify the question.

[dmb]

Basically, the question is that like eilano said, two classes, owners and staff. Demographics make cross testing difficult this year. Some participants in the staff class are above the wage base and some are not. It has been mentioned on PIX that if the document provides for allocation based on comp to comp in each class that an integrated allocation would still need to be tested. Is that true??

[AndyH]

How can you get an integrated allocation if you have a discretionary class document with people in the same class at different comp levels, some above, and some below the integration level? Is that not impossible, or at least virtually impossible?

Maybe this helps. If you give each class the same percentage of pay, the result is a safe harbor and you do not need to test.

If instead you have two people, each in their own class, it should be possible to reach the same allocation result as if you had a safe harbor integrated plan. Then do you need to test? I suppose you might technically, but it would be a no-brainer to pass by simply imputing permitted disparity in the test (and testing on a contributions or allocations basis, not cross-testing).

[Earl]

Andy - So you are saying that a cross tested allocation that blows up due to, say, all the HCEs being younger than all the NHCEs, can default to integration rather than salary ratio. Actually, I think you are saying that it defaults to salary ratio but you can still imput disparity on that salary ratio allocation and be non-discriminatory.

By doing so, I think I am trying to default directly to a safe harbor allocation method that is deemed non-discriminatory rather than defaulting to salary ratio (which is a safe harbor allocation method that is deemed non-discriminatory).

If this is ok, it looks like I could always use a cross tested plan document because, worst case, it defaults to integration.

[rcline46]

The answer is both more complex and simpler than it seems.

First, you must follow the terms of the document. In a grouped or tiered plan that ususally means you MUST allocate a contribution in any group on a comp to comp basis. How you choose the amount in any group is the trick, and if an integrated formula is used, so be it. And if done properly, this will pass on an allocations basis.

If you have an anomaly, such as an NCE getting an itegrated portion you have to choose whether to limit them to the base percent, or use an 401a4-11g amendment to justify the additional contribution.

The main question is why you let your client get into such trouble? You should be more on top of the situation so you change BEFORE the year end and avoid the problem.

[Tom Poje]

Lets see. You said you had 2 classes, and the formula is comp to comp.

Unless all members of one class make the same comp (e.g. all memebrs of class 1 have comp > 200,000) it would be impossible to end up with a contribution that would duplicate an integrated formula for that class. You might come somewhat close - I suspect Larry Deutsch was simply pointing out that class 1 could still receive a slightly higher rate of pay than class 2, not by cross testing, but, as Andy pointed out, by testing on an allocation basis and imputing disparity.

My logic says, in that scenario, class 1 members end up with less than they would if the plan had been integrated. That sounds like poor plan design or poor planning. I have seen too many studies that look good, but fall apart if but one NHCE quits.

[Earl]

I think I am trying to change the direction a little bit. Maybe I should start a new thread, but...

I am talking about a two group plan and it is comp to comp within the groups.

But due to demographics, say all the HCEs are younger than all the NHCEs, cross testing produces no positive disparity between the two groups so it defaults to allocation non-discrim (rather than benefits non-discrim).

What I think I am hearing here is that you can imput disparity on the allocation and end up with (essentially) an integrated allocation rather than a comp to comp across the board for all employees of both groups.

Thus, I could reduce the plethora of documents that I am sponsoring (and paying for monthly) to one, a cross tested VS doc, because, worst case, it could default to a salary ratio allocation with imputed permitted disparity (essentially an integrated design).

Is this true?

[Mike Preston]

"What I think I am hearing here is that you can imput disparity on the allocation and end up with (essentially) an integrated allocation rather than a comp to comp across the board for all employees of both groups."

Geez, this just doesn't seem to die, does it? No matter how many times the responders indicate that it can't be done, or that it won't work out this way except in unusual circumstances, the posters continue to say exactly what you have posted above.

Wow.

[AndyH]

It is true only in very limited situations.

For example, assume it is 2002 and you have two people, each in their own class, one earning $150,000 and the other earning $50,000.

You give the guy earning $150,000 what happens to amount to 12.4738% of pay. He gets $18,710.70.

The other person gets 10% or $5,000.

If you test each on a contributions basis in 2002 and impute permitted disparity, each will have an allocation rate of 15.70%.

Now add a third person to the mix and put him in either group. If he is in the higher group, his contribution will not be the same as in an integrated setting unless his comp is the same. But if he is in the second group, as long as he earns below the SS Wage base he will still get the same 10% he would have received in an integrated plan.

[Tom Poje]

actually, what I was saying was that you have to follow whatever formula you have, which is probably comp to comp.

you could allocate 15% to one group and 13% to another, but when you test, test on an allocation basis and impute disparity.

dad burn it, Andy answered the same time as I did ,but included a better example

[Blinky the 3-eyed Fish]

Tom, to avoid inciting any pyromaniacs out there, I prefer dad gummit.

[Earl]

is that a Geo. Bush joke?