Integrated allocation in profit sharing plan; don't understand how the document's "comp plus excess comp" formula works

[Lori H]

Is there an integrated allocation where the compensation used is in excess of the $200,000 limit?

After looking at several allocations I've become confused. Some formulas indicate a percentage of

comp as a base contribution plus 5.7% of comp in excess of the TWB. While another formula indicates

a formula of allocating 5.7% of the sum of each participant's comp plus excess comp. However, if this

allocation causes someone to exceed the Cumulative Permitted Disparity Limit the allocation shall be based on the participant's comp rather than comp plus excess comp. If someone could clarify what is

comp, excess comp and total comp it would be appreciated.

[Blinky the 3-eyed Fish]

You cannot use compensation in excess of the 401(a)(17) limit for allocations in a qualified DC plan. The definitions you inquire about are specific to the document.

[Tom Poje]

Ha. That question brings back memories. A number of years ago someone asked me a question along similar lines. I was trying to explain that you had to limit the compensation used and the individual insisted that a lawyer had designed the plan, he knew what he was doing, and you didn't have to limit the compensation.

I pointed out that the 5500 C asks if the compensation was limited to the 401(a)(17) limit . (I said this goes back a few years) The response was that 'this year' the 5500 R was being used and it doesn't ask that question. Can't argue with logic like that!

[mwyatt]

I remember that example from the boards. Definitely a valid legal argument (in a twisted sense of logic), but I don't remember the Code Section that stated small plans only had to comply with the Code once every three years .

[AndyH]

Isn't that the three year testing cycle?

[mwyatt]

I've always been a might uncomfortable relying on 3-year testing for a small plan (or "snapshot" testing for that matter) under 93-42. Might be one thing to argue that data collection for 14 divisions and 10,000 employees is too much, but I'd have a hard time arguing the case of 1 doctor and 2 nurses is too difficult to do real testing each year...

[AndyH]

You don't have trouble getting timely census (with everyone on it) from Doctor's offices?

[mwyatt]

Like pulling teeth, depending. I do know, however, if in year 1 I have 1 doctor and 2 nurses in a plan that requires 1000 hours for benefit accrual, and next year 1 of the nurses quits with 700 hours (let's see, year 2, my ratio if no failsafe language is 1/2=50%), that I:

1) Wouldn't want to say that I'm fine for year 2 since I passed in year 1, or

2) Say that at the end of year 2, my ratio is now 1NHCE/1NHCE present on snapshot testing.

I think I'd have a hard time keeping a straight face in front of an IRS agent by arguing that it was too difficult to pull data on 3 people to use point 1, and snapshot testing under 93-42 seems to gut the whole premise of ratio testing if I can just blow out people who left during the year and use 77% as a threshold instead of 70%.

[AndyH]

To copy someone else's words (who we haven't heard from in a while), I don't disagree.

And, don't forget important Doctor plan design-use a 3 year cliff vesting schedule and there'll be 100% staff turnover every 2.49 years. That'll invalidate the 3 year cycle for sure.

[AndyH]

Back to Lori for a minute, Lori I'm curious about your reference to the cumulative permitted disparity limit. That's a concept more common in DB plans or general testing of DC plans, not something pertinent to regular integrated DC plans. It has to do with the use of more than 35 years of service. Do you want to discuss that reference?

[Lori H]

Thanks to everyone for their responses. AndyH, the reference to the Cumulative Disparity Limit was taken from the Basic Plan Document of a Defined Contribution Prototype. It is referenced in the formula for Minimum Allocations Required for Top-Heavy Plan Years. It's interesting that someone mentioned the allocation prepared by an attorney. This is one of the reasons I'm confused.

I have a 2001 Plan Year allocation prepared by an attorney/actuary which uses the following formula:

Step 1 is 3% of comp.

In Step 2 there is a column which shows the excess comp, a column for the ratio each participant's excess bears to the total excess, the third column multiplies the remainder of the contribution by the excess ratio, the fourth column shows the lessor of 3% of comp or the total in column three.

Step 3 is comp plus excess comp multiplied by 2.7%. The participant with $170,000 in comp received an allocation of $7,009.20 which is ((170,000 + 89,600 = 259,600) x 2.7%.

Step 4 is the remainder of the contribution multiplied by comp %.

[Tom Poje]

ah! so the person didn't really receive a contribution based on comp above the $ limit - it was just the way it was mathematically written out (ee was shown with $259,600 as 'comp') that confused you.

combining the first three steps into one you have:

the person received 5.7% base plus 5.7% of comp above the integration level

then step 4 is the remainder of the allocation on base compensation.

[Lori H]

Mr. Poje - thank you for your response. However, I've taken another look at

this illustration and believe STEP 3 was calculated with 401(a)(17)comp plus comp excess of TWB(80,400). I will try to explain the steps better. The participant had $170,000 in comp. In Step 1 he received an allocation of $5,100. In Step 2 he received an allocation of $5,100. In Step 3 he received an allocation of $7,009.20 and in Step 4 an allocation of $9,314.91. If you add the allocations for Step 1-4 it totals $26,524.11 and this is what he received as a contribution. The total allocation to 6 participants was 84,086.40. Also, to clarify Step 2 and the 3% of Total Comp allocation. Step 2 was 3% of Total Comp to those in excess of the TWB. Any thoughts? Step 3 is what I question an allocation of 7009.20 was given based on 259,600 comp. and that is 89,600 in excess of 401(a)(17). And there were no 5500C/R in 2001. Probably unfortunate for this attorney.

[R. Butler]

It seems to Step 1 should be 170,000*.03=5,100

Step 2 should be 89,600*.03=2,688

Step 3 should be 259,600*.027=7,009.20

Step 4 should be pro-rata using 170,000 as comp.

It seems it to me the Step 2 allocation of $5,100 is wrong. Excess comp. should have been used in Step 2, not the 170,000; that just repeats Step 1.

Your excess contrib. can't exceed 5.7%, but it can't exceed the pro-rata protion either.

Step 1 you are allocating the top heavy minimum

Step 2 you are allocating a 3% excess, so that the excess & the base are both 3%

Step 3 The total excess contrib. can't exceed 5.7%, so you take the comp. plus the excess comp. and multiply by 2.7% (5.7%-3% excess you allocated in Step 2)

Step 4 Excess contrib. done, so now you just allocate anything else pro-rata according to comp.

[Mike Preston]

Lori, what you need to do is to do the complete allocation yourself, based on how you think it should be done. What you will find, I think, is that the allocation was done properly. Try it. Post what your calculations are, if they end up with a different total.

[Tom Poje]

I agree with the 'Butler'. If the employee received 5100 in step 2 the calculation was incorrect. it looks like the individual received 2412 too much.

I believe this can be corrected under EPCRS