x-tested plan: integrated

[Guest padmin]

We have a cross tested psp on a corbel vs document owners and non-owners are the groups. Due to a demographic shift the x-testing does not work without massive contributions to the non-owners. Can we shift to an integrated or pro-rata allocation and deem it to be a safe harbor allocation formula?

[Blinky the 3-eyed Fish]

If you are talking about a plan year that has passed, it's too late to amend the formula, but you really don't need to. What you should understand is that general testing can be passed on a benefits basis (i.e. cross-testing for a DC plan) or on a contributions basis. If you provide an allocation of the same percentage of pay to everyone, you are assured of passing on a contributions basis without even running the test. Thus in effect you have a safe harbor. Now if you impute permitted disparity for the general test, you can get the same result as a integrated plan with the excess contributions based on 100% of the taxable wage base.

[Guest padmin]

Thanks Blinky,

I agree. Corbel continues to assert that we must mindlessly x-test the allocation even though it is not stipulated in the document.

[jquazza]

Now if you impute permitted disparity for the general test, you can get the same result as a integrated plan with the excess contributions based on 100% of the taxable wage base.

I think you have to be careful here. Most of the time, the participants in the same group will receive the same rate of contribution. If their compensation are different, you may end up with different rates when you input disparity.

[Tom Poje]

to make things clear:

in this case testing will be done on an allocation basis rather than an accrual basis.

If you are using 100% of the TWB, and max disparity of 5.7% then all ees should end up with the same E-Bar.

If two people have different comps, it doesn't matter, they receive the same % of pay. when you impute disparity they still will have the same % when finished.

If one of the ees is above the TWB, then before imputing disparity one will have a greater %, but after imputing disparity they will have the same %

about the only cases I can think of where someones ebar might be different is if you used calendar year comp for allocation purposes but comp from date of entry for testing purposes.

[Blinky the 3-eyed Fish]

I am not sure but maybe Jquazza's point was is to be concerned with how the document is defined with two groups, ownerns and non-owners. If there are multiple people in the owners group and the allocation within each group is based on compensation / total compensation in the group, well then of course you need to follow your document and you won't be able to mirror an integrated formula if the people have different compensation amounts.

In short, follow your document, which I hope always goes without saying.

P.S. Tom, you are up by six posts now.

[jquazza]

Suppose you have two employees in owners group, one making 200k, the other making 100k. Say the rate for the group is 15%. We're testing on a contribution basis.

-EE1- gets $30k. $6,390 of which can be attributable to permitted disparity. So his 15% contribution rate could be comparable to a 11.8% contribution for someone under the TWB.

-EE2- gets $15k. Only $689.70 attributable to permitted disparity. You would need a 14.31% to benefit at the same level under the TWB.

[Blinky the 3-eyed Fish]

I didn't check your math, but it's an intuitive result considering you aren't actually allocating the contribution on an integrated basis within each rate group in your example.

[jquazza]

Correct and that's my point. Unless the plan document specifically says your allocation will be done inputting permitted disparity within each group, you have to follow the terms of your plan document and cannot input disparity for allocation calculation, just for testing.

[Tom Poje]

working through the formula:

C Rate = allocations / (plan year comp – ½ TWB)

D Rate = [allocations + (5.7% * TWB)]/comp

assuming a 15% allocation to all groups:

all NHCE would be 15% + 5.7% = 20.7%

100,000 would be 20.01% (D rate)

200,000 would be 17.51% (D Rate)

Assumed plan year was 2003 and TWB 87,900.

But this was for example purposes only.

I did not read your question properly, I would assume the document says allocate comp to comp. when that happens the HCEs will have smaller e-bars if tested on an allocation basis. the reason being is that for testing purposes, part of the contribution will be considered to be 'integrated' though it really isn't.

or put another way, it would be possible to allocate the owners group more than 15%, but because comps are different you wouldn't equal the effects of having an integrated plan - each HCE would receive the same %. but they could receive a higher % than the NHCEs. and at that point you might even consider the dreaded component plan testing.

[jquazza]

Tom,

You end up with folks in the same group with different rates. Very seldom do you see plans that are drafted to imput disparity within each group allocation. In most cases, the contribution is allocated comp/total comp within each group, so that if you're going to respect the allocation formula, the 100k & 200k have to receive the same % of comp.

If you're testing on a contribution basis, you can take it as far as the HCE in the favored group with the lowest comp will take you (as he will have the highest % of comp.)

To answer the original question, I think you can set your rate and test the plan on contribution basis, inputting disparity if you wish, but you cannot input disparity in your allocation calculation unless the dosument specifically says so. So to get the maximum disparity between the groups, you have to set your rate for the least favored group based on the rate the HCE with the lowest comp in the favored group received.

If you have an HCE in that favored group who is making less than the TWB, then inputting disparity won't help you one bit in your test. You'll still have to show enough NHCEs benefitting at his rate.

[Tom Poje]

agreed wit heverything you say, (or just simply 'greed' in the case of HCEs)

you are correct if the HCE makes less than the TWB imputing disparity won't help.

The example given was both ees above the wage base so I didn't consider that, but it is possible to have an owner (or worse in a poorly written group, the owners kids with less than the wage base)