Multiple Profit Sharing Contributions

[WesleyT]

A plan allocates discretionary profit sharing contributions on a per pay basis, with no true-up. Let's say the employer has been funding 5%, but wants to switch to 2% prospectively in the middle of a plan year. Does the fact that contributions are calculated and allocated per pay, with no true-up, allow the employer to change the contribution amount at any time? For purposes of 401(a)(4), does this satisfy a design based safe harbor since each contribution amount on its own would satisfy the safe harbor?

The plan doesn't have any entitlement requirements for the profit sharing contribution. So, the issue of what benefit has been accrued by participants should be raised. This technically isn't a change of contribution/allocation formula, only the discretionary contribution amount. Isn't each participant only entitled to a discretionary amount determined and allocated each pay period?

[Jim Chad]

It is possible the document is written in a way that this might be OK. Is everyone in their own category?

[WesleyT]

The plan is integrated. The plan only dictates that the contribution shall be determined and allocated at the end of the plan year, unless otherwise elected in the adoption agreement. The adoption agreement has elected to do this on a per pay basis.

[Tom Poje]

so someone who makes 2000 each week has been getting 5% each week. now at the end of the year he made 104,000 which is above the integration level. but since its done on a weekly basis, with no true up he never hits the integration level???????????

or

one person has been making 1000/week. would get 5% up to this point and then 2%. so 1/2 year 26,000 * 5% + 26,000 * 2% = 1820 or for the year an avg of 1820/52000 = 3.5%

someone else was making 1000/week but received a raise to 1500. 5% * 26000 + 2% * 39000 = 2080 2080 / 65000 = 3.2%

do you see a possible discrimination issue arising?

lets take it one step further.

owner takes a paycheck of 200,000 the first week at 5%. now the contribution is reduced to 2% the rest of the year.

I don't care what he takes the rest of the year. It sounds like you have a possible discrimination issue.

[Bird]

I don't know how you allocate an integrated formula on anything less than a plan year, but ignoring that for now and assuming that you are indeed following the terms of the plan, I believe you may indeed change the formula mid-year. (Just like you may, if the plan allows it, allocate 15% to participant A and 5% to participant B.) The problem, as Tom notes, is that it may result in a discrimination issue.

My (Ft William) plans allow for allocations on a shorter basis that a plan year, but this caveat is in the Adoption Agreement right under that option:

NOTE: Selection of C.35b.ii through C.35b.v may result in the Plan not meeting a Code section 401(a)(4) safe harbor allocation formula within the meaning of Treas. Reg. 1.401(a)(4)-2(b)(2).

I think you must do general testing on the resulting contributions.

(And I'm skeptical about combining an integrated allocation formula with less-than-annual allocations. I don't know how to do it.)

[12AX7]

My Volume Submitter Adoption Agreement does not permit the use of any period (other than annual) if the permitted disparity allocation election is made.

I can't see how the rules of PD can be followed in this manner without a possible true up at the end of the plan year. Check your document language again. I'd be surprised if it were missing similar language to the one I have.

[Jim Chad]

I agree with the other postings. One more big problem will be someone leaving mid year. At year end, you are going to have to redo a lot to make this legal. And it is likely there will be major problems, not just a lot of work.

I sincerely wish you good luck. And you may want to talk to him now about billing by the hour to correct this FUBAR

[ETA Consulting LLC]

I sincerely wish you good luck. And you may want to talk to him now about billing by the hour to correct this FUBAR

I think it's time for Benefitslink to take a note from Facebook and add a "Like" button; I'd definitely click it.