General Testing

[justatester]

Hi--I have a group of plans that are part of a controlled group. The formula is as follows:

The global profit sharing is the same program across all participating plans. The amount is determined each year by the board. The 2010 Plan Year amount of $1026.53 award was for a person who was employed the full year. If an employee is hired during the year or they die or retire during the year they get a pro-rated amount based on the number of months that they worked at least one day. For example, someone hired in December would get 1/12 of the full award.

Since not all employees received the full $1,026.53 would general testing be required?

[Lou S.]

Looks like you just miss the safe harbor exception under 1.401(a)(4)-2(b)(2). If they got 1/52nd per week worked you'd be OK but doesn't look like 1/12th month satisfies the safe harbor exepction on uniform dollar allocation per unit of work.

Still though I'm having a hard time imaging a scenario where your alloction would not pass testing on an allocation basis.

edit - as a followup if only the new hires are a concern, couldn't you just test separately as all your new hires would prsumably be NHCEs unsless they were owners.

[ETA Consulting LLC]

I would try to keep this as easy as possible. You can break the plan up into components. For instance, suppose that out of 20 employees there were 4 NHCEs that received less than the full amount. If you would pass the coverage ratio test after assuming these 4 were "NOT" benefiting, then no further testing would be required. It's basically component testing while each component passes 410(b).

I agree with Lou on the Safe Harbor issue, but it's awfully close to a safe harbor formula. Just keep in mind that if you can break the plan down into components (where each component passes the coverage ratio test), then you've provided a simple solution to a simple problem.

Good Luck!

[justatester]

Thank you for the comments...I realize in practice you would have a hard time not passing. I wanted to confirm in "principal" they technical are not a safe harbor formula.