Traditional Allocation

[pbarrett]

We have a small new comp plan (1 owner/ 3 partricipants). The demographics changed whereby the owner is the youngest. To get it to pass, I have to give the nonowners 21% and the owner gets about 10%.

Is it possible to forget the new comp allocation due to failure and just run the allocation using a "traditional" profit sharing allocation (contribution/wage)???

We're using a Corbel doc and it appears to be silent.

[Guest Bob Kayak]

I have come across a similar situation. Rather than use a traditional allocation, I worked backwards with the formulas in 401(a)(4)-7 to create an allocation that passes with imputted disparity, on a contribution basis. Then use the effective allocation percentages as the rates going to each group. For example, 6% to the rank and file group and 9.256% to the owner group. (Based on 2004 limits and owner making over compensation limit.)

I'd also get an amendment in place for next year so you don't have to deal with this again.

Note that imputting disparity can not be done if this is a safe-harbor plan which is using a non-elective contribution.

[Mike Preston]

What kind of amendment are you talking about?

[Tom Poje]

pbarrett:

you did not provide enough info in regards to your formula.

Corbel documents (as well as others I am sure) could have formulas written in different ways.

The most limiting would be 'super integrated' and if you had that you would need to amend to get a more traditional formula.

But if you had a class formula (non integrated) then there is nothing to prevent you from testing on an allocation basis, thus you could give everyone the same % of pay (or even a little higher % to the owner and impute disparity)

for some unknown reason everyone thinks you have to test by converting contributions to benefits (hence cross-testing).

[Bird]

You can do general testing on a contributions or benefits basis, so if all participants get the same percentage of pay (you are allowed to impute permitted disparity) then you'll pass on a contributions basis.

Whether your current allocation formula lets you get where you want to go is another matter. If your document has groups, then you should have no problem. If it's superintegrated, everyone probably gets the same percent up to a certain level like 3%, so you could make small, equal contributions, but finding a sweet spot above that might be problematic or impossible.

[Guest Bob Kayak]

What kind of amendment are you talking about?

An amendment to change the allocation structure for next year, before participants earn a right to another contribution based on the current design.

Given the demographics provided, I don't believe the company is well served with their current allocation structure. (Based on a 21% rate to non-owners, and 10% to owners on a cross-tested basis.) Unless they want to keep the structure and test on a contributions basis each year that is.

[Mike Preston]

Bob, I just don't get what you are saying. We don't know the structure of the existing new comparability plan, do we? Perhaps it is as flexible as anything you might be thinking of going to. We just don't know.

I'd like to know what the provisions are before I suggest they do something to change.

Then again, maybe I missed something in the translation.