Integrated Top Heavy P.S. Allocation

[Lori H]

Hi,

A plan is being amended to an integrated allocation from a comp percentage allocation. Plan is top heavy.

The plan currently maintains an American Century doc. It states that under Top Heavy, first there will be an allocation of 3% to all eligible participants. Second step is an Excess Comp allocation multiplied by the Permitted Disparity Percentage. In this case we are using the TWB for 2007 of $97,500 and therefore a PDR of 5.7% (225000-97500)*.057 = 7267.50 is the second step allocation. The third and final step is the remainder of the contribution allocated on a comp percentage basis.

This differs from a Top Heavy Profit Sharing allocation in a Mass Mutual Corbel prototype and in fact is less beneficial to the sole Key Employee.

Am I missing something?

[Mike Preston]

How is it different? How is it less beneficial?

[buckaroo]

Also, am I reading this correctly? How can you give 3% on total and 5.7% on excess? I belive this violates the integration rules.

[Lori H]

In a $22K allocation the key employee receives appx $200 less under the American Century doc. compared to the formula in the MassMutual doc. Perhaps I am using the wrong Permitted Disparity %. Irregardless, the Mass doc states for integrated, top heavy plan, 1st step is 3% to all participants, 2nd step is 3% times participants excess comp., 3rd step is 2.7% times sum of total comp and excess comp and 4th step, if any funds remaining are allocated on a comp percentage.

American Century has a 3 step integrated TH allocation. Mass has a 4.

Should there be a difference?

[Guest Sieve]

The formula discussed in the OP is not proper. The second step only applies to excess comp., so there will be only 3% allocated on comp. below the wage base, and 8.7% above the wage base (3% + 5.7%). To give 8.7% above the wage base, you need to have at least 4.35% below the wage base; 3% below the wage base only permits 6% above the wage base. Something's rotten in Denmark.

[Lori H]

This is how their current plan doc(American Century) reads pertaining to an integrated allocation:

First, a percentage of the contribution equal to his or her excess comp for the allocation period divided by the excess comp of all eligible participants for the allocation period, but not to exceed his or her excess comp for the allocation period multiplied by the Permitted Disparity Percentage, and

Second, a percentage of any remainder of the contribution equal to his or her comp for the allocation period divided by the comp of all eligible participants for the allocation period.

If a minimum contribution is required under Section 10.2 for a plan year, the employer profit sharing contribution will first be applied to make the minimum contribution, then any remainder will be allocated under the preceding rules.

Section 10.2 Minimum contribution if plan is Top Heavy

An employer PS Contribution will be made for each participant who is not a key employee and whose termination date did not occur during the plan year in an amount equal to the lesser of the following:

1) the highest contribution received under the plan or a related defined contribution plan for the plan year by any key employee OR

2) 3% of his testing comp for the plan year.

Therefore Step 1, should be the 3% T.H. minimum ONLY to the non-key employee?

Step 2 is 5.7% of comp in excess of the TWB?

Step 3 is the remainder of the contribution allocated based on a comp %?

[Lori H]

2 participants

1 Key Employee, Comp $283870.84

1 Non Key, Comp $36271.39

[ERISAnut]

Okay,

Sieve is on point with this. You have to understand the difference between a two-step process and a four-step process. Under the two step process, you 1) begin integrating immediately and cease the integration at the maximum level and 2) allocate the remaining contribution prorata.

Under the four step process, you 1) Allocate 3% on base compensation (up to the $230,000 limit for 2008), 2) allocate 3% only on the excess ($128,000 in 2008 assuming the TWB as the integration level), 3) allocate 2.7% on compensation plus excess compensation and 4) prorata on the remaining amounts.

Under the example above,you cannot integrate at a level that exceeds your base.

PS. There is nothing in the Step 1 formula that states that it is provided only to the non-keys. You added this yourself. Under a four step formula, everyone gets the 3% because the actual profit sharing allocation is being designed to meet the top heavy requirement as it gets allocated to everyone.

[Guest Sieve]

As -nut says, the first step of a 2-step process is to integrate as you allocate, but you can only do that if you allocate to total comp & excess comp. at the same time.

Lori H: Read the document carefully. Are you sure that the first step in the process does not ask you to compare each participant's "total comp + excess comp" to the aggregate of all "total comp + excess comp.", and that the Step 1 allocation cannot exceed "total comp. + excess comp" times the permitted disparity percentage? (It just has to, or it's a dead wrong allocation formula.) That formula would work--it's exactly what -nut described as the first step in the 2-step integration formula.

[Mike Preston]

Lori, I repeat my request for you to demonstrate how it is less beneficial. In other words, I'd like to see the details of how you are doing the two calculations.

The documents are intended to be identical if the contribution is enough to ensure that the maximum permitted disparity factor is used.

Are you allocating an amount which is less than the maximum? If so, the two formulas will most certainly differ due to the way the math works out.