int. PS formula no longer good?

[Guest noans]

Hello,

I have a plan document that states integration formula is 4.3% and $20,000.

With 2008 SS wage base at $102,000...this puts the $20,000 below 20% of TWB.

Is this formula still appropriate? and if not, how do I correct it? ignore doc and run at 5.7%?

Thanks so much for answers!!

[Tom Poje]

you can not ignore the terms of the document (if the terms are hard coded exactly as you have described)

all that means is you have a formula that does not meet 'safe harbor', so should be tested for nondiscrim.

If you test on an allocation basis and impute disparity I would find it hard to believe it wouldn't pass testing.

[Guest noans]

you can not ignore the terms of the document (if the terms are hard coded exactly as you have described)

all that means is you have a formula that does not meet 'safe harbor', so should be tested for nondiscrim.

If you test on an allocation basis and impute disparity I would find it hard to believe it wouldn't pass testing.

Thanks so much Tom. Off I go to allocate and test!

[Laura Harrington]

I don't agree that this plan does not satisfy the permitted disparity safe harbor under 401(l).

The regulations do not say that the maximum disparity has to be 5.7%, it says it cannot exceed 5.7%.

Treas. Reg. 1-401(l)-2

(b) Maximum permitted disparity--(1) In general. The disparity provided for the plan year must not exceed the maximum excess allowance as defined in paragraph (b)(2) of this section. In addition, the plan must satisfy the overall permitted disparity limits of §1.401(l)-5.

(2) Maximum excess allowance. The maximum excess allowance for a plan year is the lesser of--

(i) The base contribution percentage, or

(ii) The greater of--

(A) 5.7 percent, reduced as required under paragraph (d) of this section, or

(B) The percentage rate of tax under section 3111(a), in effect as of the beginning of the plan year, that is attributable to the old age insurance portion of the Old Age, Survivors and Disability Insurance provisions of the Social Security Act, reduced as required under paragraph (d) of this section. For a year in which the percentage rate of tax described in this paragraph (b)(2)(ii)(B) exceeds 5.7 percent, the Commissioner will publish the rate of such tax and a revised table under paragraph (d)(4) of this section.

[Tom Poje]

I agree (somewhat), what I wrote didn't quite come off what I intended. my apologies!

my point initially was intended to simply say that you have to follow the terms of the document.

however, you can't simply say

"The regulations do not say that the maximum disparity has to be 5.7%, it says it cannot exceed 5.7%." becasue paragraph 'd' says if you have an integration level less than the taxable wage base then the maximum 5.7% must be reduced" (so, for instance, you couldn't say I can always use 5% becasue that is less than the maximum 5.7%)

what I should have said, was that the regs tell you what the max % is if you use more than 20% of the taxable wage base but less than 100% than the max% is either 4.3% or 5.4%. The 5.7% can be the max if you use less than 20% (and therefore using less than 5.7% would be ok as well).

What I had intended to say (hmmm, maybe I shouldn't try to write a response while someone else is in the office asking misc questions, sometimes you hit 'post' before finishing your answer...) anyway, what I had initially intended to say was that even if you tested using the allocation method you would pass. the point being, why do the regs describe 'safe harbor formulas' for profit sharing plans? if you allocate comp to comp you have a safe harbor formula and don't have to test. Wow. and if you tested on an allocation basis, everyone would have the same %, so its no big deal. If you use 100% of the taxable wage at 5.7%, and tested on an allocation basis imputing disparity everyone would still have the same % (assuming the contribution is large enough) - thus the fact the regs tell you that you have a formula that doesn't have to be tested is a foregone conclusion based on the formulas involved. (I'm old fashioned enough to believe people should try running the numbers once) at 100% of the TWB at 5.7% just to prove that it works out that way