Broadly Available Allocation Rates and Permitted Disparity

[Rolf Trautmann]

A DC plan provides a base contribution of 8% of eligible pay for participants with over 5 years of service and 3% of eligible pay for all other participants, plus an excess contribution of 5.7% of pay above the Taxable SS Wage Base for participants with over 5 years of service and 3% of pay above the Taxable SS Wage Base for all other participants.

Does this plan meet the broadly available allocation rates exception of the cross-testing gateway allocation requirement?

If not, is the only way to meet the gateway requirement is to provide the lesser of 5% or 1/3 the allocation rate of the HCE with the highest allocation rate?

Any help on this would be greatly appreciated.

[Tom Poje]

that would seem to meet one of the requirements for broadly available (namely that you have 2 rates, and difference in allocation rates resulting from any method of permitted disparity is disregarded.) though I have never seen a formula put forth that way before. Interesting.

You still have to pass 410(b) by treating the one group as includable and not benefitting.

[Rolf Trautmann]

Thanks for you reply Tom. My concern is that this formula does not meet 401(l) and thus is deemed to be a method that does not use permitted disparity.

The reason I don't think it meets 401(l) is the Uniform Disparity requirement of 401(l) does not seem to be met. 401(l) states that "The disparity provided under a plan is uniform only if the plan uses the same base contribution percentage and the same excess contribution percentage for all employees in the plan".

Are there other definitions of permitted disparity which is not defined in 401(l)?

[Tom Poje]

hadn't thought about the uniformity issue you cited. Though that may only apply in determining if the plan meets safe harbor.

the example used in the preamble to the regs on cross testing simply uses 10% and 3% groups and says differences in allocation rates resulting from any method of permitted disparity provided for under section 401(l) regulations wil be disregarded.

If the 10% group was integrated and the 3% group wasn't integrated, then would you argue that the disparity still wasn't uniform because you could have someone in the 3% group with comp high enough that wasn't treated the same as the 10% group? if that was true, then the item pertaining to ignoring permitted disparity makes no sense, because you will always be non uniform.

Again, I do not know 100% for sure.

Given the formula you indicated of 8% + 5.7% excess and another group at 3% plus 3% integrated, and you want to use broadly available bands, that implies the 8% group passes 410(b). If it is passing the ratio % of 410(b), then I would be surprised if the plan would fail testing on an allocation basis, in which case the gateway minimum is a moot point.

[Rolf Trautmann]

Actually, the Plan formula is a little more complicated than my example. I tried to simplify it to get to the crux of my problem - Can we meet the cross test gateway by using broadly available allocation rates and does this formula meet the permitted disparity requirements of 401(l) so that the differences in allocation rates can be ignored?

[Tom Poje]

Based on what you are saying, my guess is that you probably don't have broadly based rates - at least proably not under the guidelines intended by the IRS.

I would find it hard to believe that the gateway minimum would cost that much more

an ee at 200,000 is only going to receive around11.2% or so, which means 1/3 of that is 3.73 and you were already giving 3% - I wouldn't think it would be worth taking a chance or pushing the limit.