Each participant in his own group

[Guest Serena]

I am used to seeing plans set up for cross testing using named allocation groups in the plan document. When it comes time to fund the contribution as of the tax return due date, the group method is followed and tested as stated in the plan - is 1. Owners, 2. HCE non owners, 5. Dept Heads, 6. Rank and File. So you have clear allocation groups set forth in the plan.

However, how does it work if each participant is in his own group? Is this much flexibility allowed, whereby after the plan year has ended, the employer could change what they wanted to give to the HCEs lets say depending on the last minute plan design needs, or could create or delete certain allocation groups and merge into another group if that would work better.

This seems to allow too much discretion. How is this method usually used by a TPA?

I appreciate your help!

[Bill Presson]

I am used to seeing plans set up for cross testing using named allocation groups in the plan document. When it comes time to fund the contribution as of the tax return due date, the group method is followed and tested as stated in the plan - is 1. Owners, 2. HCE non owners, 5. Dept Heads, 6. Rank and File. So you have clear allocation groups set forth in the plan.

However, how does it work if each participant is in his own group? Is this much flexibility allowed, whereby after the plan year has ended, the employer could change what they wanted to give to the HCEs lets say depending on the last minute plan design needs, or could create or delete certain allocation groups and merge into another group if that would work better.

This seems to allow too much discretion. How is this method usually used by a TPA?

I appreciate your help!

This method is allowed and is used by a number of plans. However, you say that the employer could "create or delete certain allocation groups..." and that is not accurate nor is there a need to do so. Each participant is in a separate group. Just because they are allocated the same dollar amount or percentage of compensation doesn't mean you are creating or deleting groups.

Then just test as normal.

[Guest Serena]

Got it! Thank you so much!

[Tom Poje]

the precautionary note is that

In the case of self-employed individuals (i.e., sole proprietorships or partnerships), the requirements of 1.401(k)-1(a)(6) continue to apply, and the allocation method should not be such that a cash or deferred election is created for a self-employed individual as a result of application of the allocation method.)

in other words, if the plan was audited and you had an agent who got up on the wrong side of the bed, it could be argued you have a disguised CODA for an HCE. Its a tough thing to prove either way. I believe at ASPPA Conferences the IRS response was "We would know it if we see it"

[Mike Preston]

One other cautionary note is that in case you end up using zero as the percentage for a specific participant, the 410(b) test must use 70%, as it has the effect of excluding a participant by name.

[Guest chuckb]

Also, make sure that there is a Corporate Resolution with an exhibit that shows the dollar amount to be allocated to each participant.