When a participant moves from one allocation group to another

DLavigne · November 4, 2011

I can't find anything written that states as of what date the allocation group classifications are made. The plan document simply names the groups. If the document has two allocation groups; Owners and All Others, and a participant is an owner part of the year but isn't at the end of the year, which allocation group is he in when it's time to allocate the contribution?

ETA Consulting LLC · November 4, 2011

You will not find it anywhere but within the plan's language (if it's there). The governing rule in play here is that the Plan Administrator (likely the employer) is responsible for interpreting the provisions of the plan.

What must happen here is that the employer must make a reasonable interpretation of their provisions. I, personally, would make the determination as of the last day, but you could easily say "anyone who was an owner at any time during the year would be in the owner group."

Purely an interpretion issue.

It does "kind of" question the authenticity of the group being "definitely determinable"; doesn't it.

Good Luck!

movedon · November 4, 2011

I'd look at what group he was in at the point during the year when he satisfied the accrual requirement for the year.

Tom Poje · November 7, 2011

based on the recently released LRM from the IRS (Oct 2011)

In the event that an eligible employee is included in more than one participant allocation group, the participant’s share of the employer contribution allocated to each such group will be based on the participant’s compensation for the part of the year the participant was in the group.

p.126 of the DC LRM

while I have attached a file, it can be found (along with another LRM for CODAs) at

http://www.irs.gov/retirement/article/0,,id=97182,00.html

this is a good website to keep handy, lots of stuff there.

At the recent ASPPA Conference Q and A the IRS basically said the same thing (though their comments were actually made before the LRMs were released)

Q 31

Plan has 2 allocation groups - 8% contribution to "day shift employees" and 5% contribution to

"night shift workers." The plan requires 1000 hours to receive an allocation, but no last day

employment requirement. For the current plan year, Bob starts out the year working the day

shift, and completes 1,200 hours in that status. Then, during the year, he switches to night shift

and works an additional 800 hours for the remainder of the year. (a) How should his allocation

be determined? (b) If it is determined that the formula applies based on whether the participant is

a day shift or night shift employees as of each hour, does the fact that the contribution rate per

hour decreases when the employee transfers to the night shift create a 411(d)(6) issue? © If the

employee is entitled to both the 5% and the 8% contribution rate for his hours, how does that

affect the general test under IRC section 401(a)(4)?

Our answer. (a) This is primarily a plan drafting issue. The question is whether a participant's contributions are

determined on an hour-by-hour basis, depending on whether each hour is earned on the day shift or night shift, or

whether all hours are treated the same based on a participant's classification as of a particular date. If the document

is ambiguous, the plan administrator will have to interpret the plan. (b) No 411(d)(6) issue. The change in contribution

rate is due to an employment change, not a plan amendment. © The employee's contributions will be combined to

compute his EBR, and then he will be placed into the appropriate rate groups for general nondiscrimination testing.

IRS answer. The IRS agreed with our analysis. They added that the document could take an approach where it

identified a date as of which the classification as a day shift or night shift employee is determined (e.g., first day of the

plan year, last day of the plan year), and then compute the contribution for all hours for that plan year based on that

classification, regardless of the individual's classification for each hour within the plan year

........

all that being said, change of ownership does not effect if an ee is an HCE or a key employee

Bird · November 7, 2011

At the recent ASPPA Conference Q and A the IRS basically said the same thing

Mmm, I prefer to focus on the last sentence "They added that the document could take an approach where it

identified a date as of which the classification as a day shift or night shift employee is determined (e.g., first day of the

plan year, last day of the plan year), and then compute the contribution for all hours for that plan year based on that

classification, regardless of the individual's classification for each hour within the plan year"

I'd be inclined to think that status on the last day, typically the valuation date, would determine the group, unless something else specifically override that.

Kevin C · November 7, 2011

I would focus on the first sentence. "This is primarily a plan drafting issue." The allocation method is supposed to be spelled out in the document in sufficient detail. Another approach I've seen in documents is that a participant in more than one allocation group receives an allocation only from the group he is in where he would receive the highest percent of pay allocation. As noted in the Q&A response, If the document is not clear, the ERISA Plan Administrator has to interpret the document.

DLavigne · November 7, 2011

Thank you all. The employer wants to give this employee the allocation for the Owner group for the portion of the year he was an owner and the allocation for the all others group for that portion of the year, and that's exactly what the LRM says.

Thank you.

November 9, 2011