Design-Based Safe Harbor?

[lkpittman]

I have a PSP that allocates contributions and forfeitures to each eligible participant in the same proportion to which his or her Hours of Service bears to the total Hours of Service of all eligible particpants. I think I've got a design-based safe harbor under 1.401(a)(4)-2(b)(2)(i) --allocation of the same dollar amount for each uniform unit of service (not to exceed one week) performed by the employee during the year. I've got someone questioning whether this is a design-based safe harbor--who is right? Any help is appreciated.

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LKP

[mwyatt]

If I understand you correctly, the contribution is allocated solely on hours worked (with some sort of check for IRC 415, 404 issues, etc.) I would tend to bet that given the physical limit on hours worked during the year that the "Safe Harbor" issue is moot since if anything, I would think that this type of plan either includes no Highly Compensated Employees (if I owned the company I sure wouldn't sign up for this type of plan design) in which case there is no issue, or if you did look at the General Test that you would pass incredibly easy. More details please?

[lkpittman]

Thanks for your interest and input. They do have HCEs; it's not a large company--maybe 30-40 employees (with 4-5 HCEs). In the past, the er didn't contribute (the plan also has a CODA and deferrals were being made), but in recent years, the er has started contributing. Allocation language is: "...contributions shall be allocated amoung eligible Particpants for each calendar quarter during the Plan Year in the same proportion that his or her Hours of Service during the calendar quarter bears to the total Hours of service of all Participants for that quarter." There is no limit under the plan as to the # of Hours of Service which can accrue for allocation purposes. But without getting into the logistics, on the face of it, would you agree that the language of this formula represents a design based safe harbor? i.e., this formula allocates the same $ amount for each unit of service performed by the ee under 1.401(a)(4)-2(B)(2)(i)?

Again, thanks for your help.

Laureen

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LKP

[mwyatt]

Looking at the Regs, 1.401(a(4)-2(B)(2)(i) states:

"(2) Safe harbor for plans with uniform allocation formula. (i) General rule. A defined contribution plan satisfies the safe harbor in this paragraph (B)(2) for a plan year if the plan allocates all amounts taken into account under paragraph ©(2)(ii) of this section for the plan year under an allocation formula that allocates to each employee the same percentage of plan year compensation, the same dollar amount, or the same dollar amount for each uniform unit of service (not to exceed one week) performed by the employee during the plan year."

I think that given your situation, it appears that you do have a safe harbor design. You should also look at your Determination Letter filing (if any) as Appendix A (now Schedule Q) indicated whether the plan was filing as a safe harbor. Your DL would also state if the plan is qualified as a safe harbor plan.

As an aside, fairly uncommon plan design (most owners would rather skew on compensation rather than hours worked). This is a design more commonly seen in a Union plan than a single employer plan.

[This message has been edited by mwyatt (edited 06-10-99).]

[lkpittman]

Thanks--I agree with you. By the way, the DL issued (TRA 86) was issued stating that 401(a)(4) and 410(b) were satisfied based on the fact that no HCEs were benefiting. This clearly isn't the case; and there are no exclusions in the plan, so with a PSP/401(k), I don't know how this squeaked by the IRS (well, I take that back. . . it's the IRS).

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LKP