New Comparability w/Integrated Allocation

[Go401k]

If you have a new comparability profit sharing plan where each employee is in their own group. Can you provide an integrated allocation and not have to do the cross testing for the plan and only test the coverage? Are there any other issues or items to consider?

[chc93]

This question just came up in our office in the last few days. Consensus is that if each is in their own group, any allocation is acceptable as long as it passes 401a4. And a safe harbor integrated formula automatically satisfies 401a4. So no cross-testing needed. Only coverage test needed.

[Mike Preston]

While what you have indicated may be correct in most circumstances, it is not technically correct. To avoid non-discrimination testing the formula in the plan has to actually be a safe harbor. Hence, if you allocate as if you had a safe harbor integrated formula you still have to do a non-discrimination test. Most of the time you will then perform the non-discrimination test on the basis of contributions, rather than benefits. So you won't typically be using cross-testing. But you still need to do a non-discrimination test.

All of that is academic if the allocation is done as if you had a safe harbor integrated formula AS LONG AS THE SAFE HARBOR FORMULA USES 100% OF THE SOCIAL SECURITY WAGEBASE. If you use one of the optional safe harbor formulas which uses a lower percentage of the Social Security Wagebase then you can easily run into a circumstance where the allocation will FAIL non-discrimination testing even though it faithfully allocates in accordance with a safe-harbor formula.

[Bird]

Mike Preston is 100% correct (of course!). Put another way, while you may be doing an allocation that happens to yield the results of a safe harbor formula, that formula is not in the document, so you have to general test. That should pass the general test, with the caveats noted.

[Tom Poje]

I suppose it is possible some are familiar with different terms so to is avoid possible confusing on terminology

(at least for individuals using Relius software)

testing on the basis of contributions is the same as testing on an allocation basis

testing on the basis of benefits is the same as testing on an accrual basis

[John Feldt ERPA CPC QPA]

Test on a contributions basis, impute disparity at 100% TWB.

[BG5150]

This could all fall apart if you add a 3% SH in there, right?  You would have to test it on a benefits basis?

Fact pattern:  3% SHNEC.  $20,000 PS to be allocated on top.  In the past, it was allocated using an integrated formula (100% of TWB, but integration % was small, ~1%).  Was thought ok, b/c the PS is on an integrated formula.  New comparability allocation method, each in own group called for in doc.

But I thought, after reading this thread, we would need to test both the PS & SH on a benefits basis b/c you can't integrate the SH piece with the PS and the HCEs will have a higher overall contribution rate.

 

[John Feldt ERPA CPC QPA]

Yes, you have to exclude the 3% SH from the portion that is imputing disparity. You could not integrate using the 3% SH even if the plan had a hard-wired integration formula, right? So you still get the same results, but still noting Mike's comments above.

[Mike Preston]

Maybe I'm missing something, but if you layer a SHNEC of 3% over an integrated allocation using 100% of the TWB I can't see how testing on contributions will fail.  Enlighten me?

[ETA Consulting LLC]

I think everyone may be saying the same thing, but the wording might be confusing.

You can have a permitted disparity formula that says 3% of total Compensation plus 3% of Excess Compensation (and define Excess Comp as Comp over the TWB) and it would be deemed a uniform allocation formula.

However, you cannot use the 3% SHNEC as a base to that allocation and have it treated as a uniform allocation formula.  You CAN use it as a base, but you're formula would not be considered uniform; and additional testing would apply.

But, once you satisfy integration, you can add ANY prorata formula (3% SHNEC included) on top of it and it will pass.  The issue with the 3% SHNEC is that you cannot use it as the base of the formula or when imputing disparity under 401(a)(4) testing.

Good Luck!
 

[Bird]

Does this help?  You adjust the PS ("basic" below) for permitted disparity, then just add the 3% to get the total allocation rate for testing.  We call it "ageless" testing in my office.  Sorry about the formatting.

	Basic	Alloca-		Adj.	3.00%			SH	Final Adj.
Plan	alloca-	tion		Allocation	SH	Total 'er		Allocation	Allocation
Comp	tion	Rate		Rate	Alloc	contrib.		Rate	Rate
-	-	-	-	-	-	-		-	-
39,608	2,812.19	7.10%		12.80%	1,188.25	4,000.44		3.00%	15.80%
265,000	27,050.00	10.21%		12.76%	7,950.00	35,000.00		3.00%	15.76%

[Mike Preston]

A better example would have been to stick with the $20,000 total "Basic" allocation and shown that it would break down as $1,756.62 and $18,243.38.  I didn't take the time to make sure that rounding was exact so you may get slightly different results.

[cdavis25]

On ‎1‎/‎5‎/‎2017 at 5:05 PM, Mike Preston said:

Maybe I'm missing something, but if you layer a SHNEC of 3% over an integrated allocation using 100% of the TWB I can't see how testing on contributions will fail.  Enlighten me?

I know this is old, but we had a similar situation on a small plan.  How about you give the 3% SHNEC to all.  Then, integrate PS using 100% of the taxable wage base (the doc has each ppt in their own group).  Coverage for 401a in the 410b test is 100% b/c everyone is getting 3% SH.  The avg ben test is failing, since most of the NHCEs do not defer.  Now, 6 out of 10 NHCE get the int PS.  The other 4 do not b/c they did not meet the allocation requirement of last day or 1000 hours for PS.  They are not excluded or term'd with under 500 hours.  The two HCEs get the PS.  So, they fail the rate group on a contribution basis at 60%.  So, it is possible to fail 401a4 when doing this.

Suppose the only difference was the PS formula was hard coded in the document for integration so that 401a4 was not required.  Then, they would not have the same issue b/c the SH allows them to pass coverage right?

[cdavis25]

Or, would component testing resolve this issue?

Group 1 would be the 4 NHCE that get SH only.

Group 2 would be the 6 NHCEs and 2 HCEs that get both SH and int PS.

Both groups pass coverage by themselves and therefore, pass 401a4 on the design base SH?  Would it matter if the plan was written as new comp each in their own group or fixed integration?

[BG5150]

How does group 2 satisfy coverage.

2/2 HCE = 100%

6/10 NHCE = 60%

Remember, the 4 NHCEs are not benefitting under group 2.

[cdavis25]

That is right...they still count.  Component testing does not work.

Also, it would not matter if the plan had the integrated formula fixed in the document.  You loose the design base when the allocation requirements for last day or 1000 hours are applied to the PS part.  That creates a nonuniform formula b/c the SH goes to all and triggers 401a4.  Right?

[Mike Preston]

5 hours ago, cdavis25 said:

I know this is old, but we had a similar situation on a small plan.  How about you give the 3% SHNEC to all.  Then, integrate PS using 100% of the taxable wage base (the doc has each ppt in their own group).  Coverage for 401a in the 410b test is 100% b/c everyone is getting 3% SH.  The avg ben test is failing, since most of the NHCEs do not defer.  Now, 6 out of 10 NHCE get the int PS.  The other 4 do not b/c they did not meet the allocation requirement of last day or 1000 hours for PS.  They are not excluded or term'd with under 500 hours.  The two HCEs get the PS.  So, they fail the rate group on a contribution basis at 60%.  So, it is possible to fail 401a4 when doing this.

Suppose the only difference was the PS formula was hard coded in the document for integration so that 401a4 was not required.  Then, they would not have the same issue b/c the SH allows them to pass coverage right?

You are confusing 410(b) with 401(a)(4).  There is no point in testing 401(a)(4) if you are failing 410(b).

[cdavis25]

Mike, they pass 410(b) on the nonelective portion b/c everyone is getting the 3% SH giving them a benefit on nonelective.  Now, the issue is failing 401a4 ratio % for the group.  6 of the NHCEs get SH and PS.  4 of them only get SH.   This is testing on a contribution or allocation basis.

[Mike Preston]

On 7/19/2019 at 12:49 PM, cdavis25 said:

Mike, they pass 410(b) on the nonelective portion b/c everyone is getting the 3% SH giving them a benefit on nonelective.  Now, the issue is failing 401a4 ratio % for the group.  6 of the NHCEs get SH and PS.  4 of them only get SH.   This is testing on a contribution or allocation basis.

Wow! This issue keeps coming up.  While it leaves a bad taste in one's mouth, I think it works AS LONG AS THE PS FORMULA IS WRITTEN INTO THE DOCUMENT AND THAT FORMULA SATISFIES A SAFE HARBOR. I maintain that a new comparability formula such as everybody in their own group can NEVER satisfy the regs to qualify as an actual SAFE HARBOR.