Permitted allocation groups

[Guest Tamra]

Is it permissable to group employees based on years of service; e.g., employees with up to 15 years of service get x% contribution, employees with 16-20 years of service get y% , and ees with over 20 years get z%. Or can allocation groups only be based on criteria other than service?

[Guest ERead]

Service is fine for groupings, just remeber that the tests are based on age, and service. You'd probably want to run some projections with the group in question and see if they'll pass based on prior information with the groups/formula that you'd like to do.

In any case - service groups are fine.

[kboyce]

Agreed, service group is perfectly acceptable. But I would consider adding additional groups to handle HCE's. The HCE classes can be further broken down by service groups. This allows more control in the case of a fairly young HCE who might otherwise mess up the 401(a)(4) test results. From your message it wasn't clear to me but I would strongly suggest eliminating any specific contribution % for each class. The document can provide there is a separate discretionary contribution for each class for absolute flexibility.

[This message has been edited by kboyce (edited 11-25-98).]

[Guest Tamra]

Thank you eread and kboyce for your

responses. I appreciate your help! Do

you have document language for group allocations you would let me plagiarize?

I have three clients that want their docs

amended by 12/31.

[Tom Poje]

e.g. Group A shall include all doctors who have at least 10 years of service with the Employer.

Group B shall include all doctors who have less than 10 years of service

Group C shall include all other employees

and as kboyce says, keep things discretionary.

at the ASPA conference, someone suggested having a group 'terminees > 500 hrs' they don't have to get anything, but you have them there as a further option.

[Guest pdaniels]

In completing an adoption agreement for a cross tested plan, it specifically asks for the %'s to be allocated to each group, (in the next section of the agreement after you define your groups); Can you just not fill this in... or just type in language that the amount will be determined each year by resolution, etc.

[Guest Cbanarer]

Tom Poje gave an example of class definitions. This raises a couple issues:

1 - Can you base class definitions on date of hire rather than length of service (e.g. all employees who were hired on or after January 1, 1997)

2 - If class definition is based on legth of service, then I assume each year some employees may move from one class to another as their length of service increases.

[richard]

To P. Daniels' message:

Is this an adoption agreement for a money purchase plan or a profit sharing plan?

To Cbanerer's message:

#1 - Yes, you can base class definitions of date of hire as well as length of service (but be careful to clearly define what the date of hire is for rehires)

#2 - You are correct. Employees can move from one class to another (similarly, an employee can change classes by changing job title).

[Guest pdaniels]

The adoption agreement is for a profit sharing plan. Thanks.

[richard]

To P. Daniels

I don't understand why in a profit sharing plan would you have to specify the percentages to each group. Does anyone out there understand why?

Under a recent IRS notice (of course I've forgotten which one), all you need to do is to define the groups and define the allocation methodology within each group (typically in proportion to pay within that group).

At the time that the plan sponsor makes the contribution, they specify how much goes to each group.

[Guest Laura Millwood]

Scenario: 3 HCEs, classifications allow 1 HCE to receive an 18% contribution, while the other 2 HCEs New Comp receive 0% allocation. I am trying to prove that all HCEs are still included in coverage testing, but the client feels they shouldn't be because of the 0% contribution rate. The regs don't seem to be specific enough to convince him. Any suggestions?

[Lorraine Dorsa]

Inclusion in the testing group depends on eligibility (age, service, hours worked, etc), not on the fact that you ended up with an allocation of $0 (zero is a legitimate number, just like 1 or 10 or 10,000).

The coverage rules of IRC 410(B) define includable and excludable employees, not the employer's decision to give them an infinitesmially small (= zero) contribution.

[Guest A Pozek]

I have a client who would like to classify employees by the office in which they work. I know the code says that classification by geographic region is generally acceptable. However, all of this client's offices are in different suburbs of the same city. I have been unable to find any guidance on how strictly "geographic region" should be interpreted. I have conducted preliminary testing, and the plan passes using such a classification. Does anyone know if such a classification is acceptable?

[This message has been edited by A Pozek (edited 07-04-99).]

[Lorraine Dorsa]

Classifications can be anything you want, as long as they are "definitely determinable." I have done classifications based on office/subsidiary/division, professional status (physicians, RNs, etc), date of hire, job category, etc. so I see no reason, as long as clearly defined in your document, not to use office location (100 Main Street, 2 Elm Street or Smithtown, Jonesville, etc).

Be careful that the language works in your document--just typing in a phrase or two in a prototype, while killing the prototype status, may not clearly define the group or the method of allocating contributions between the groups such that the allocation is definitely determinable.

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[Guest LJS]

We have a client that has many offices throughout the city. However, each office is classified as a different cost center. Therefore, we used cost centers for our groups.

[Guest Tom Geer Daily Access Concepts]

Are the different allocation rates "benefits, rights or features" subject to Regs. 1.401(a)(4)-4? 1.401(a)(4)-4(e)(3)(iii)(D) and (F) apply specifically only to deferrals and match, but arguably they apply a fortiori to allocation rates.

If you take the position that the cross-testing regulations override the benefits, rights and features regulation, you still have to deal with 1.410(B)-4(B). This requires that the classification be reasonable and established under objective business criteria. It is by no means clear whether this standard applies to allocation groups or testing groups.

Assuming you ignore that, you still have to worry about the risk that the plan design will be deemed to create the equivalent of 401(k) arrangements, subject to testing ond the $10,000 401(g) limit. This is s serious risk if (1) you slice and dice too finely, and/or (2) the internal economics of th group are adjusted to reflect plan contributions.

Certainly there is latitude, but it is not unlimited. In my experience you can get very, very close to the intended results while using reasonable business classifications, so there is no, or very little, reason to push the envelope too hard.