Amount in board resolution

[Zorro1k]

When drafting a board resolution that indicates the amount of an employer's discretionary profit sharing contribution, is there any compelling reason (legal or practical) to list the amount to be allocated to each individual employee? I have someone who wants it done that way and I don't think it makes much sense. Any thoughts?

[QDROphile]

The total contribution is the responsibility of the Board. The allocation is the responsibility of the plan document. The Board can effectively determine the allocation by its control over plan terms (e.g. amendment), but otherwise should not get involved with the actual allocation of the contribution. It should limit its express action to the contribution.

This thinking is driven in large part by the presumption that the company is not so stupid or ill-advised as to have the company be plan administrator. If you are looking for a legal reason, specific determination of allocation is an administrative/fiduciary function. Determination of the discretionary contribution is not a fiduciary function. The board should not want to be a fiduciary. If the board dabbles in fiduciary matters, the board will be a fiduciary and will not know how far the responsibility and potential liability goes once the fiduciary status is unconsciously established.

[Mike Preston]

What is the allocation formula in the plan?

[Mike Preston]

The vast majority of small plans have the company as the Plan Administrator and suffer not because of it.

[Doghouse]

This usually shows up with a new comparability plan. There is a requirement that the allocations for the various groups be declared in writing, in order to meet the definitely determinable allocation requirement.

[QDROphile]

Mike Preston:

True if (a) the company has no directors or executives that are not expected to function as fiduciaries and all directors and executives are aware that they have full fiduciary responsibility and attend to it, or (b) there are never assertions of substandard fiduciary performance. I suspect that a lot of (b) is responsible for your position. And to quibble with your wording, I agree that the plans do not suffer. The potential victims are the directors or executives who do not understand that they are fiduciaries with potential personal liability and fail to pay attention to the responsibilities that they fail to understand that they have. The corporate entity will not shield them from personal liability.

[Mike Preston]

Reminds me of those all too frequent conversations I have when talking to the company representatives of mid-size plans when I find that the person I'm talking to is both the HR supervisor and the named Trustee. Come to find out that part of the listed job responsibilities for the HR supervisor is to be the named Trustee! I usually end up telling them that the only way out is to quit.

[BG5150]

This usually shows up with a new comparability plan. There is a requirement that the allocations for the various groups be declared in writing, in order to meet the definitely determinable allocation requirement.

So, if everyone is in their own group, do you have to specify who gets what in the resolution?

[K2retire]

This usually shows up with a new comparability plan. There is a requirement that the allocations for the various groups be declared in writing, in order to meet the definitely determinable allocation requirement.

So, if everyone is in their own group, do you have to specify who gets what in the resolution?

That's the way it's done at the two TPA firms I've worked for.

[Tom Poje]

not sure what other documents may say, but the FT William document has the following language in the checklist:

NOTE: If D.18f or D.18g is selected, the amount allocated to one group need not bear any relationship to amounts allocated to any other group. The Company shall also notify the Plan Administrator in writing of the amount of contributions allocated to each group by no later than the due date of the Company's tax return for the year to which the contribution relates.
..........
I suppose it is a bigger issue if the $ are pooled, how in the heck do you simply say
"Contribution for 2015 is $100,000" without some sort of tracking.

[Bird]

We do it as a separate document - a memorandum from the company to the trustee (usually the same person).

My sense - not from anything concrete but just a sense - is that they (IRS) do not care and threw in the towel on enforcing this. I'm not saying you shouldn't do it, but something scribbled on a bar napkin might take care of it.

[Belgarath]

Re-upping this question - our documents, similar to the FT William document Tom references, simply require that the notification must be "in writing." I would interpret this to mean that s special resolution isn't necessarily required - a copy of the allocation, prepared by the TPA, ought to be sufficient. Particularly since the Employer/company is generally the Plan Administrator in many small plans.

Thoughts?

[RatherBeGolfing]

20 minutes ago, Belgarath said:

Re-upping this question - our documents, similar to the FT William document Tom references, simply require that the notification must be "in writing." I would interpret this to mean that s special resolution isn't necessarily required - a copy of the allocation, prepared by the TPA, ought to be sufficient. Particularly since the Employer/company is generally the Plan Administrator in many small plans.

Thoughts?

I agree.  My document simply states "The Company shall notify the Plan Administrator in writing of the amount of contributions allocated to each group.

anything that meets that requirement should be sufficient.  

[Belgarath]

Thanks.  As I seem to recall (maybe incorrectly) the resolution "requirement" was never "official" guidance anyway, but something from the podium, or gray book, or based on some audit issues, etc...

[Mike Preston]

Check out the March 13, 1998 IRS Memorandum from Robert Padilla:

INTERNAL REVENUE SERVICE MEMORANDUM

 Date:           March 13, 1998

 To:              Robert Padilla, Chief, EP/EO Cincinnati Key District

 From:           Director, Employee Plans Division, CP:E:EP

 Subject:        Requirement for definitely determinable allocations

 On September 8, 1994, we issued a field directive concerning whether a profit sharing plan that provided for employer discretion to determine amounts allocated to particular groups of employees satisfied the definite predetermined formula requirement under section 1.401-1(b)(1)(ii) of the Income Tax Regulations. The field directive concluded that this requirement was not satisfied for such a plan.

 On June 30, 1996, we issued a second field directive which rescinded the prior field directive and illustrated several plan designs that satisfied the definite predetermined formula requirement.

 You have asked whether the first field directive was rescinded in its entirety or was limited to the illustrated plan designs. The first field directive was revoked in its entirety. Consequently, the second field directive should not be interpreted as applying only to the illustrated plan designs, but rather to all plan designs. A plan would not violate the definite predetermined formula requirement if the employer has discretion to determine the amount of the contributions to be allocated to particular groups of employees defined under the plan and the plan specifies the method for allocating these amounts among the employees within each group. The number of people in each group or the number of groups is immaterial provided that each group is identifiable under the plan and the identity of particular employees in each group is not subject to employer discretion. It is also immaterial that the purpose for forming the groups is to satisfy the cross testing requirements under section 1.401(a)(4)-8. For example, a plan with defined groups including a group with one person (i.e., 100% shareholder) would not violate the definite predetermined formula requirement.

 Although the plan can provide for employer discretion to determine the amount of employer contributions for each group, the plan must require that the employer notify the trustee, in writing, of the amount of contributions for each group. This requirement does not mean that the plan must provide the specific amount of contributions for each group. Instead, the plan must provide that the trustee be given written notification from the employer as to the amount of the contribution to be allocated to each group. [Emphasis added.]

 If you have any further questions regarding this matter, please call Mr. Al Reich of Technical Branch 5 at (202) 622-7976.

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I doubt the number is still good, but the bottom line is that every plan should have language which addresses this issue.