Is this a non-safe harbor allocation formula?

[Earl]

Taking over a plan with the following fixed contribution formula:

8.75% of pay up to the wage base

+

5.7% of pay above the wage base

My foggy recollection of integration was X% on all + 5.7% on excess and x had to be >,= to 5.7%, which it is here.

So I am thinking that this is not stricly under the permitted disparity method and would require general testing. Does that seem correct?

Thanks

[Laura Harrington]

I think this is a safe harbor permitted disparity formula. In fact, I think this formula is poorly written and is not giving the highly paid individuals any additional benefit.

The formula you described is commonly referred to as a step-rate formula: X% of compensation up to the integraton level plus Y% of compensation in excess of the integration level.

The maximum disparity allowance in a safe harbor formula is the lesser of the maximum disparity percentage (5.7%, 5.4%, 4.3%) or the base contribution percentage.

In a step-rate formula, X is the base contribution percentage and the disparity is Y-X.

In your example, the base contribution percentage is 8.75%. 5.7% (the maximum disparity percentage since the integration level is the taxable wage base) is less than 8.75%, so the maximum disparity allowance is 5.7%. In your case Y-X must be equal to or less than 5.7%.

5.7%-8.75% = -3.05%, so it definitely falls within the guidelines. However, as you can see, the formula provides no additional benefits!

A better formula would be 8.75% of compensation up to the taxable wage base and 14.45% of compensation in excess of the taxable wage base.

In this second formula, the base contribution percentage is 8.75% so the maximum disparity allowance is still 5.7% as previously illustrated. Y-X (the disparity provided by my formula) must be equal to or less than 5.7%.

14.45%-8.75% = 5.7%, which satisfies the permitted disparity safe harbor.

[Earl]

I think I get it. Since (3.05%) < 5.7% the disparity present is less than the disparity permitted so it is still within the Safe Harbor constraints.

Thanks

[Jim Chad]

Earl, Did you type what you meant to in your original inquiry? If I am reading it right, you are sticking it to the highly paid. They are getting less than prorata. ...or maybe I am reading it wrong.

[Laura Harrington]

Earl, Did you type what you meant to in your original inquiry? If I am reading it right, you are sticking it to the highly paid. They are getting less than prorata. ...or maybe I am reading it wrong.

You are not reading it incorrectly. If the formula is as it was typed in the original post, then those with income over the taxable wage base are receiving less than pro-rata.

[Earl]

Yes, the formula percentage goes down after the TWB is reached.

My theory is that when they converted from a MP to PS Plan, the person writing the PS document, while trying to maintain the MP formula, didn't really know what they were doing and typed it up wrong. Re-inforced by a review of prior year's administration where the contribution is 8.75% of all + 5.7% of excess, what one would expect to see but not what the doc says.

Gotta love takeovers.