document language for cross-testing

[Santo Gold]

In defining the classification groups for our cross-tested plans, our document calls for group #1: "An allocation up to the maximum permissible amount under IRC §415". All other groups call for a pro-rata allocation among the individuals in each group.

If there is more than 1 individual in group #1, would you interpret the allocation language to mean that you can basically give the individuals in group#1 any arbitrary amount? For example, we give the 415 max to one individual, $15,000 to a second individual, and $0 to the third individual. Granted, it all has to pass 410(b)/401(a)(4), but if it does, would this sound right to you? FWIW, Group #1 is always used just for HCEs.

Thanks

[Jim Chad]

I can't get my head around this.

Does the document really require that the 1st group gets maximum allowed by 415? Does this mean the non elective isn't discretionary.....it is required?

[Bill Presson]

I can't get my head around this.

Does the document really require that the 1st group gets maximum allowed by 415? Does this mean the non elective isn't discretionary.....it is required?

I think it says "allocation up to 415". I would really rather have the guys in different groups than deal with this.

[Bird]

Most documents have additional language saying how to allocate within the group (probably pro-rata); does this one? My guess is that the drafter didn't contemplate having more than one person in that group.

[Santo Gold]

Unfortunately, what is shown is exactly what is in the document. I agree that I think it was intended to be used only for 1 individual, but that seems to have gotten lost over the years and now more than 1 person is being thrown into this group. I would advise that we use pro-rata in this group even if it doesn't say to do so. But I was just looking for opinions on whether anyone thought it is OK to give the folks in this group whatever you want since there is no allocation method shown.

Just curious, does this violate the concept of "definitely determinable" benefits?

[Bird]

Just curious, does this violate the concept of "definitely determinable" benefits?

Probably...almost certainly, IMO. And that's the problem - you don't really know how to allocate to that group. I'd lean towards pro-rata vs. "whatever you want" but only because it is consistent with typical language. Maybe if you submit for an FDL by 4/30/10 you'll have a chance to fix it. That doesn't help with the '09 allocation right now...

[Santo Gold]

Since we have an IRS opinion letter saying that the form of the document is approved, does that mean "all is well"?

[WDIK]

Since we have an IRS opinion letter saying that the form of the document is approved, does that mean "all is well"?

No. The opinion letter is only giving approval for the form of the plan, not the actual operation of the plan.

[BG5150]

In our documents, a lot of times group A is owners, and their group gets a pro rata share for their group.

However, that doesn't mean each one has to get the same amount.

Example: (all comp at the max)

Owner 1: 16,500 deferral and 7,350 SH would get 25,150 in PS

Owner 2: 10,000 deferral and 7,350 SH would get 31,650 in PS

Owner 3: 0 deferral and 7,350 SH would get 41,650 in PS

As a group, the allocation would be 98,450. The document prevents people from going over 415 limit, so Owners 1 & 2's allocation is reduced.

[Tom Poje]

but we're not in Oz, so when does going over the 415 limit rainbow occur?

In your example, what if owner 1 was over age 50. would you then allocate more profit sharing to him because he is catch up eligible and didn't use the catch up yet with his deferrals?

........

again depending exactly how the document is worded, at at least one ASPPA Conference the IRS implied you would allocate comp to comp, then use EPCRS to correct violation of 415 limit - return of deferrals to the participant, because that is favoring the individual (that is, the participant is getting company money rather than deferrals)

[BG5150]

but we're not in Oz, so when does going over the 415 limit rainbow occur?

In your example, what if owner 1 was over age 50. would you then allocate more profit sharing to him because he is catch up eligible and didn't use the catch up yet with his deferrals?

........

again depending exactly how the document is worded, at at least one ASPPA Conference the IRS implied you would allocate comp to comp, then use EPCRS to correct violation of 415 limit - return of deferrals to the participant, because that is favoring the individual (that is, the participant is getting company money rather than deferrals)

In my example, I should have stated that none of the owners were over 50. Sorry.