Permitted Disparity used in the general test of 401(a)(4) for a DC pla

[Guest WBrown]

Would you agree with the following testing scenario:

A profit sharing plan has multiple rates of allocation and is also integrated to the allowable extent under 401(l), using the taxable wage base. For 1998, let's say that group 1 employees with salary below the TWB get a 2.0% allocation, and those above the TWB get 4.0%. For group 2, those under get 4.0%, and those over get 8.0%. Further complicating things is that a non-414(s) definition of compensation is used for allocations.

The plan needs to pass the amounts test of (a)(4) using the general test. In order to pass testing, can this plan impute permitted disparity as provided under 1.401(a)(4)-2©, even though the plan already had actual permitted disparity in the basic formula?

The introduction part of 1.401(a)(4)-7 seems to say that it can be imputed, regardless of the underlying formula that led to the allocations you're working on.

[David]

Section 1.401(a)(4)-7(d)(3) seems to preclude imputing permitted disparity for an employee who already benefits under 401(l). See also 1.401(l)-5(B)(9) Example 4.

[Guest WBrown]

I agree with your analysis, and that was the interpretation I presented to my consultant. She insisted, however, that both cites only came into play where a participant was covered under two plans.

I still think this interpretation is correct, but I'll have to present a convincing argument to her. The way the examples are written, it assumes that you're not trying to impute permitted disparity on a plan that already contains permitted disparity. I believe her interpretation relies on saying that the plan being tested is not a "401(l) plan" for this purpose, since the plan couldn't pass using a safe harbor.

[Wessex]

I agree with the consultant. A plan is only a Section 401(l) plan if it satisfies a safe harbor allocation formula using the 401(l) rules. When using a general test, the underlying plan formula is irrelevant; the relevant items are actual dollars allocated to and 414(s) compensation of each covered employee. As you all know, after those accrual rates are determined, disparity can be imputed to adjust those acrual rates (provided that the employee is not covered by another plan that satisfies 401(l) or another plan that imputes disparity). Section 1.401(a)(4)-7(d)(3) and Section 1.401(l)-5(B)(9) are not applicable. Section 1.401(a)(4)-7(d)(3) explictly provides that it applies only where the employee is covered by more than one plan. Similarly, Section 1.401(l)-5(B) (not only 1.401(l)-5(B)(3)(9), Example 4) also explicitly provides that it applies only in the two-plan situation.