Allocation based on years of service

[52626]

Employer wants to allocate a profit sharing based on the following schedule:

Less than 10 years $0

10 years to 15 years $1,500

15 years to 20 years $2,000

20 years to 25 years $2,500

25 years and more $3,000

Plan is not TH.

Plan will pass coverage

Issues with this allocation???

Sounds to good to be true. Need to know if I am missing something.

[Lou S.]

I think you might have a disguised 10 year eligibility condition that would cause a failure.

[mphs77]

Passing coverage is one thing, but will it pass non-discrimination testing under 401(a)(4)?

[ESOP Guy]

I have done allocations before on YOS vesting/Total YOS vesting before. You have to pass the rate group test when you do something like that.

What you describe is the same thing. That 401(a)(4) rules will have to be worked. out.

I would agree with Lou is that a form of 10 year elig.

Lastly, coverage isn't that hard of a test to pass. In theory you could give the bottom group all $1 and you would have 100% coverage for coverage test purposes. All coverage testing asks is does everyone benefit. It doesn't look at how much everyone benefits which is why there is nondiscrimination testing.