Integrated Formula - Different Contribution Amount for HCEs

[Danny CPA]

Hello all,

We just picked up a new plan, and the document indicates that the profit sharing formula is integrated at the taxable wage base. The client sets a percentage that they want to contribute for all of the staff (say 5%), and then run the calculation from there. The individual partners (all Key or HCEs) then select their own contribution level (all below what the integrated formula says it would be). For example, if the formula to get all of the staff 5% of pay, the contribution for one of the partners might be $15,000. However, he decides to only contribute $10,000.

The prior administrator was then running the contributions through the general test, and passed.

However, unless there is something I do not know about integrated formulas, this is an operational failure, correct? They didn't follow the terms of the plan document, which indicate an integrated formula. I am not aware of any provision that says you can reduce the integrated formula benefit (even if it is only hurting the HCE or Key Employees).

In terms of correction, how would we go about this? The only ones who were shorted in contributions were key employees or HCEs. It is my understanding that they have done this for 2 years (2015 and 2016).

Thank you all for your assistance.

 

 

[Bill Presson]

It is an operational failure and a stupid one. If it will pass a4, why didn't they just amend the plan and put everyone in their own group? I would also want to avoid the semantics of "the individual partners then select their own contribution level" as that's a failure as well.

Any chance the PS amount that the HCEs selected could really be a deferral?

[ESOP Guy]

Before you go too far down the path this is an operational failure double check the plan doesn't allow some place for everyone to be in their own group.  That is this plan's best hope is that provision is hiding in the document some place. 

[Bill Presson]

13 minutes ago, ESOP Guy said:

Before you go too far down the path this is an operational failure double check the plan doesn't allow some place for everyone to be in their own group.  That is this plan's best hope is that provision is hiding in the document some place. 

Agreed, but I've never seen one that had everyone in their own group AND had an integrated allocation formula.

[ESOP Guy]

As for corrections if they don't want to make everyone whole they could file a VCP and try for a retro-amendment.  Since the retro-amendment would only mean the HCE stay at the lower benefit level the IRS MIGHT bless it.  An experienced ERISA attorney could give better insight on those odds. 

[Soundbc1]

Could there be an amendment effective 2015 hiding out there?

I could be naïve in my old age, but it is hard to imagine there are still "bad" TPAs.

On second thought, I worked for a bundled provider 7 years ago, I pointed out what they were allowing in a plan I reviewed was an operational failure.  They acknowledged it was, but they didn't want to change because "it might upset the client" and the bundled provider had been doing it wrong for years.

I stuck around for about 3 more weeks and started my own firm.

[Danny CPA]

Thank you all. Unfortunately there is no amendment hiding out there. The plan was fully amended/restated in 2015 AND 2016, and both documents have the same integrated formula as the option. It is a standardized prototype document, which, again, does not allow for cross-testing as an option.