Different allocation formulas within the same plan?

[Carol V. Calhoun]

§ 1.401-1(b)(ii) permits a profit-sharing plan to have discretionary contributions, but requires that it have a "definite predetermined formula for allocating the contributions made to the plan among the participants."  My question is whether a profit-sharing/401(k) plan can provide for board discretion to determine after the close of the plan year, but before a contribution is made, to which groups of participants the contribution will be allocated.

Specifically, what we want to do is to specify in the plan that the board can decide to make discretionary contributions as follows:

1. No contribution at all.
2. Contribution to be allocated solely to the accounts of collectively bargained employees.
3. Contribution to be allocated to the accounts of all employees (including collectively bargained).

In any given year, the employer could elect to make contributions under 2 and 3.  However, the employer would not be permitted to elect to make a contribution solely to the accounts of employees who are not collectively bargained.

On the one hand, it could be argued that the formula is not predetermined, because the board's characterization of the contribution could result in its all being allocated to collectively bargained employees, or allocated to all employees.  On the other hand, this seems no more objectionable than having two plans (one for collectively bargained, one for everyone else), and having discretionary contributions to each.

For various reasons, we don't want to split the plan.  Does anyone have any thoughts about whether this is a problem within a single plan?

[Bill Presson]

Ms Carol, you don't mention specifically how the plan would be allocated within those groups.

However, if the plan was cross tested with everyone in their own group, can't you effectively accomplish this?

[Mike Preston]

Carol,

This issue does track back to the regulation you cited.

Some background may be helpful.  First, there is the March 13, 1998 IRS Memorandum from Robert Padilla which includes: "... 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."

You will also be able to find various IRS representatives making statements that the plan sponsor must provide written instructions to the plan administrator or trustee.  Some of those statements will include a requirement for contemporaneous instructions.  Some won't.  I've never been able to find anything definitive as to the required timing.

The closest I've come is language from the current LRM's which reads: "The employer will specify in written instructions to the plan administrator or trustee, by no later than the due date of the employer´s tax return for the year to which the employer´s contribution relates, the portion of such contribution to be allocated to each participant allocation group."  

If anybody has anything more authoritative I'd love to see it.

But based on the above, the document language you describe should easily pass muster.

 

[Carol V. Calhoun]

Thank you, Mike, that was exactly what I was looking for!