Plan Doc Language for Smoothly Increasing Rates Gateway

[LarryDavid]

If a plan document for a DC profit sharing plan defines the annual allocation as simply "discretionary", the employer has the flexibility to provide whatever percentage it wants each year and (I believe) also has the flexibility to provide different amounts to different employee types (i.e. based on age, service, job classification, etc.) as long as the allocation satisfies all NDT rules. Is this correct? My specific example involves a client that wants to provide a serivce-based schedule this year that fits within the confines of the gateway rules for smoothly increasing allocation rates, and was wondering if it had the ability to do so based on the provisions of the plan (which again simply say the amount to be provided is discretionary, with nothing futher regarding different employee types receiving different amounts).

Is there any reason to think they can't do the service-based allocation?

[Tom Poje]

this is one of those yes/no/maybe so or exactly what does the document say

(and maybe I should say "what should the document say"

in LRM94 (Language Requirement Modifications) a number of years ago the IRS had the following notes (emphasis mine)

(Note to reviewer: There are other gateways that may be used in order for a defined contribution plan to cross-test using equivalent benefits under 1.401(a)(4)-8(b). The plan may provide for a different gateway other than the minimum allocation gateway (for instance, the broadly available allocation rate

requirement of Regulations section 1.401(a)(4)-8(b)(1)(iii) or the gradual age or service based allocation rate requirement of section 1.401(a)(4)-8(b)(1)(iv)); however, sample language for other gateways is not provided herein. If a sponsor wishes to use other gateways, it is important to ensure that the benefits provided under the plan remain definitely determinable. In order for plan benefits to remain definitely determinable, the plan document should specify which gateway is used. The plan document could allow adopting employers to elect between different gateways, but in order to provide definitely determinable benefits it is not sufficient for the plan document merely to specify that one of the gateway requirements will be satisfied.)

If this concept was ever enforced, then your document would have to specify which gateway would be used. In other words, you couldn't allocate a contribution this year satisfying the service schedule this year, and then next year the minimum allocation gateway.

as I recall, the LRMs were for protyopes, but on the other hand I don't see how something could be definitely determinable in one case and not in another. It seems like the logic should still apply.

but anyway, food for thought.

[LarryDavid]

Appreciate the response Tom. One of our internal compliance guys gave almost the identical response as you did when I posed the question to him, so this is definitely worth further examination. This actually started off as a casual question from a colleague where it was believed there was nothing to worry about, and all I had to go on was her saying "Hey, my document says the contribution is discretionary, so the plan can do whatever it wants, right?" I'm hoping after a more detailed review of the document there is additional language in there that addresses the points you make above.

Thanks again.

[John Feldt ERPA CPC QPA]

If you intend to avoid the 1/3 gateway or the 5% gateway minimums by providing smoothly increasing allocation rates, my opinion is that the document must spell out the allocations rates and the years of service needed for each rate. I asked SunGard about having the document provide a discretionary profit sharing allocation, but to also spell out that these rates and allocation methods apply in the event that the employer, in its discretion, decides to make a contribution. SunGard thought it could work, but they hesitated a bit and suggested that the document should probably be submitted for an IRS Determination Letter to get reliance due to the formula having a discretionary nature to it.

Of course, this is a rare employee demographic where this allocation formula works, especially since the plan must still pass the average benefits percentage test under 401(a)(a) when using this allocation.

Has anyone ever tried writing this up as discretionary, but defining the allocations and rates in the event the employer does contribute? If so, did you submit for a D Letter?