General Test - Same Dollar Amount to Everybody

[Vlad401k]

Let's say a plan has 2 participants. Participant A is an HCE because of ownership - he owns 100% of the company and his salary is $50,000. Participant B is an NHCE and earns $100,000.

 

From what I understand, the company can make the same dollar Profit Sharing amount contribution to everybody. Let's say that contribution is $5,000 each. So that's 10% to HCE and 5% to NHCE. The software says that the General Test is failed! What would you do in this case. Is it fine to not include the General Test at all in the reports as the same dollar amount to everybody is a Safe Harbor definition?

 

Thanks.

[chc93]

I got this from reg 1.401(a)(4)-2...

(2) Safe harbor for plans with uniform allocation formula—(i) General rule. A defined contribution plan satisfies the safe harbor in this paragraph (b)(2) for a plan year if the plan allocates all amounts taken into account under paragraph (c)(2)(ii) of this section for the plan year under an allocation formula that allocates to each employee the same percentage of plan year compensation, the same dollar amount, or the same dollar amount for each uniform unit of service (not to exceed one week) performed by the employee during the plan year.

So your allocation should be OK.  Maybe there's testing options/parameters in your software such that the general test passes?

Since the allocation is a safe harbor formula, general test is not required.  In fact, a uniform percentage of compensation often fails the general test.  For safe harbor allocation formulas, we never include general test results (we don't even look at the general test in such cases, actually).

[Mike Preston]

3 hours ago, chc93 said:

So your allocation should be OK.  Maybe there's testing options/parameters in your software such that the general test passes?

Let's be a little more direct.  Your allocation is a safe harbor and it therefore *IS* ok. Who gives a flying fit whether there are options/parameters in your software?  There is no test required.

  In fact, a uniform percentage of compensation often fails the general test. 

I think what you meant to say is the a uniform percetage of compensation can fail a general test that is based on benefits.  A uniform percentage of compensation can NOT fail a general test that is based on allocations/contributions.

For safe harbor allocation formulas, we never include general test results (we don't even look at the general test in such cases, actually).

Agreed.

[BG5150]

If you are using Relius, try testing by "Contribution" basis, rather than "Accrual."  But, as others have said, you don't even need the general test, because you hve a safe harbor allocation to begin with.

[jpod]

Does the safe harbor apply if you in fact allocate the same dollar amount, or must the terms of the Plan require that you allocate the same dollar amount? 

[Tom Poje]

bg5150 - that would not work on Relius

e.g. in this case the owner has a smaller comp so if you ran a test his e-bar would be greater than others because he receives a higher % of pay. nice try though.

as indicated, since the same $ is considered to be a safe harbor why run a test anyway.

I know of nobody who runs a test on a plan in which the allocation is comp to comp or an integrated plan. though the software would work if tested on an allocation basis in those situations.

 

jpod - you still have to follow the terms of the document as to allocation purposes.

 

The net effect of providing the same contribution to everyone is to limit comp for allocation purposes to the lowest paid person receiving a contribution

 

 

[jpod]

Ok, then that's the question for Vlad401k:  What is the allocation formula in the plan? 

[Vlad401k]

The allocation states that everybody can receive a different contribution and it does allow us to do the same dollar amount contribution to everybody. So I think if we do the same dollar amount contribution to everybody that the Safe Harbor condition is satisfied and no General Test is needed. Would you agree?

[Tom Poje]

I looked it up, the reg cited by chc93 is somewhat old, though still the basically the same and is now a different cite and slightly different verbiage

it is now 1.401(a)(4)-2(b)(4)(iv)

Certain Limits on allocation.  The plan limits allocations otherwise provided under the allocation formula to a maximum dollar amount or maximum percentage of plan year compensation, limits the dollar amount of plan year compensation taken into account in determining the amount of allocations, or applies the restrictions or  section 409(n) or the limits of section 415

 

 

don't think the govt was expecting a situation like yours in which the hce has the lower comp!

[Mike Preston]

3 hours ago, jpod said:

Does the safe harbor apply if you in fact allocate the same dollar amount, or must the terms of the Plan require that you allocate the same dollar amount? 

I believe the plan's terms must specify that the allocation in that year is being made under the "same dollar amount" rubric.  IOW, if the only way they get to the allocation amount is because the plan provides the plan sponsor with the flexibility to determine each participant's allocation, that does not satisfy the definition of a safe-harbor allocation, even if the actual allocation if specified in the plan would.

[Vlad401k]

2 hours ago, Mike Preston said:

I believe the plan's terms must specify that the allocation in that year is being made under the "same dollar amount" rubric.  IOW, if the only way they get to the allocation amount is because the plan provides the plan sponsor with the flexibility to determine each participant's allocation, that does not satisfy the definition of a safe-harbor allocation, even if the actual allocation if specified in the plan would.

Just wanted to confirm if that's the case. I haven't seen a source yet where they specify that the formula must be stated in the plan document. Is anyone aware of any regs that can confirm either way?

[Tom Poje]

ft William document has the following

 

Profit Sharing allocation formula. The Company's Profit Sharing Contribution shall be allocated to eligible Participants

who have met the requirements of Section B and D.12 as follows (Section 4.03):

a. [ ] Pro rata. In the ratio that each Participant's Compensation bears to the Compensation of all eligible Participants.

b. [ ] Integrated. See D.19.

c. [ ] Points. See D.20.

d. [ ] Fixed Amount. In an amount equal to the total Profit Sharing Contribution divided by the number of Participants eligible to share in such contribution.

e. [ ] Age Weighted. In the ratio that such Participant's points bears to the points of all eligible Participants for such Plan Year.

The points awarded to each Participant shall be equal to the product of the Participant's Compensation multiplied by the

factor in the Age Weighted Appendix determined using the Participant's age as of the end of the Plan Year.

f. [ ] New Comparability - Defined Groups. See D.21.

(in addition there is (G) each person in own group

and (h) other fixed formula

................

so  with their document you would have item d checked

in other words you can't simply have 'discretionary' and do whatever way you want one year and another way in a different year, at least in their document, and I would assume other documents are similar.

[Mike Preston]

Other than the language of the regulation itself, what would you accept? "2) Safe harbor for plans with uniform allocation formula—(i) General rule. A defined contribution plan satisfies the safe harbor in this paragraph (b)(2) for a plan year if the plan allocates all amounts taken into account under paragraph (c)(2)(ii) of this section for the plan year under an allocation formula that allocates to each employee the same percentage of plan year compensation, the same dollar amount, or the same dollar amount for each uniform unit of service (not to exceed one week) performed by the employee during the plan year."

[John Feldt ERPA CPC QPA]

So the part of the regulation which states "under an allocation formula" really means "under a written allocation formula in the plan", not just "under an allocation formula"?

Thus, you are saying, in this example, if the employer resolves to provide an uniform allocation of $5,000 to each allocation group, and each group has one participant, that is not enough to satisfy the regulation for satisfying a safe harbor profit sharing allocation.

Is that a correct understanding of your comment?

[Larry Starr]

Boy, I'm not sure I agree. You are arguing that the standard grouping provisions are NOT an allocation formula.  I think that is arguable.  

If the plan allocation formula is a separate group for each employee, and each employee was allocated the same dollar amount under that provision (for this example), I sure would think we could argue that the plan qualifies in that year as a safe harbor design based plan.

Argument: Putting each person in their own group and making the same contribution to each person is making a contribution under a written allocation procedure in the plan and the result is a design based safe harbor.

Interesting. I think the result is non-discriminatory allocation under the terms of the plan.

[Mike Preston]

Yes, it is.  The history includes discussions with the IRS that revolve around a slightly different scenario.  One of the DC safe-harbor designs involves permitted disparity using a threshold other than 100% of the Wage Base.  The IRS was quick to say that a document provision where everyone is in their own group and a plan year allocation that satisfies the safe-harbor implementation at, say, 80% of the Wage Base (and therefore the threshold was not 5.7% but a smaller percentage) is not a safe harbor and instead has to be general tested.  The literature has many examples (outlines at many conferences, for example) where this point is driven home.

[John Feldt ERPA CPC QPA]

I agree that imputing disparity in your example would have to be done at the 100% TWB level. But I had not yet heard anyone apply that same logic to the uniform allocation dollar safe harbor formula. Great, thanks for that!

[Mike Preston]

How could it possibly be any different?

[Bird]

I agree with Mike 100%.  There is a distinct difference between

• the plan saying "everyone gets the same dollar amount" and
• the plan saying "everyone gets whatever the plan sponsor says they get" and then the plan sponsor, for that year, saying, "everyone gets the same dollar amount."

The first is a uniform allocation formula, and the second is...not.  So it will require general testing, and general testing is going to require some kind of percentage based test.

[ESOP Guy]

Sounds like we have an ASPPA question for the IRS. 

[Tom Poje]

one of us must be sleeping. maybe it is me, but I thought the IRS no longer participates in such events and hasn't for the last year or two.

[jpod]

I also agree with Mike Preston:  the uniform dollar formula must be prescribed by the terms of the Plan document.  That's the essence of the safe harbor provisions.

[ESOP Guy]

1 hour ago, Tom Poje said:

one of us must be sleeping. maybe it is me, but I thought the IRS no longer participates in such events and hasn't for the last year or two.

Could be I was never a member of ASPPA I just thought it would make an interesting question. 

[MargeM]

IMHO, the form of the allocation and how it is stated is irrelevant and this is just fine.  But for the cautious who think they need a general test, note that you can do a general test on dollar amounts:

"(c)General test for nondiscrimination in amount of contributions -

(1)General rule. The employer contributions allocated under a defined contribution plan are nondiscriminatory in amount for a plan year if each rate group under the plan satisfies section 410(b). For purposes of this paragraph (c), a rate group exists under a plan for each HCE and consists of the HCE and all other employees in the plan (both HCEs and N HCEs) who have an allocation rate greater than or equal to the HCE's allocation rate. Thus, an employee is in the rate group for each HCE who has an allocation rate less than or equal to the employee's allocation rate.

(2)Determination of allocation rates -

(i)General rule. The allocation rate for an employee for a plan year equals the sum of the allocations to the employee's account for the plan year, expressed either as a percentage of plan year compensation or as a dollar amount."

[QP_Guy]

Wish we had voting buttons.  I'd vote the following is incorrect 

On 1/22/2018 at 2:14 PM, John Feldt ERPA CPC QPA said:

So the part of the regulation which states "under an allocation formula" really means "under a written allocation formula in the plan", not just "under an allocation formula"?

IRS discussions and slide decks are not law, they are just indications of what the IRS would argue.  At that time.

On 1/23/2018 at 6:42 AM, jpod said:

I also agree with Mike Preston:  the uniform dollar formula must be prescribed by the terms of the Plan document.  That's the essence of the safe harbor provisions.

No, that's not the essence of the safe harbor.  The essence is that if an employer allocates according to the safe harbor, it will be deemed to pass, despite weird demographic instances when it wouldn't pass.

[CJ Allen]

A couple of observations to note from my experience(s).  The general "rate group" testing applies only to allocation methods that do not qualify for "safe harbor" treatment.  The testing software may or may not have selections for type of allocation to produce required testing results.  Some testing software packages have testing separated or selected for testing to ignore unnecessary general testing. 

In dealing with many New Comparability tests, it's common to have demographic changes in small companies where the test fails general non-discrimination testing.  If you have non-safe harbor allocation methods that require general non-discrimination testing, please be sure to review the base plan document for testing requirements.  I once worked with a volume submitter document that required general non-discrimination to be passed in any non-safe harbor allocation method.  So, in that document, even though the regulations allowed a set dollar or % allocation under safe harbor, the document required any non-safe harbor allocation to pass general non-discrimination testing (disregarding any other safe harbor).

[Larry Starr]

So Marge, just to make it clear, YOU AGREE WITH ME and not with Mike, right?

Larry.

 

[Bird]

Quote

IMHO, the form of the allocation and how it is stated is irrelevant and this is just fine. 

I disagree with that.

20 hours ago, MargeM said:

(i)General rule. The allocation rate for an employee for a plan year equals the sum of the allocations to the employee's account for the plan year, expressed either as a percentage of plan year compensation or as a dollar amount."

But that is the answer I think and it changes my mind!  Equal dollar amounts, no matter how derived, appear to be ok.

20 hours ago, QP_Guy said:

The essence is that if an employer allocates according to the safe harbor, it will be deemed to pass, despite weird demographic instances when it wouldn't pass.

And I disagree with that.  Wasn't there a post that an arbitrary allocation resulting in the same allocation as one of the safe harbor integration formulas wouldn't necessarily pass?

FWIW

[Vlad401k]

It seems like the answer is not entirely clear then. Does anyone know if the IRS ever issued any guidance on whether same dollar formula as a safe harbor means that the plan document has to specify it?

 

 

[ESOP Guy]

Oh I do think you have the answer.  If you can do the General Test on dollar amount then giving the same dollar amount to everyone means you will always pass the General Test.  So it doesn't matter if it is Safe Harbor or not you pass the General Test 100% of the time if you give exactly the same dollar amount to everyone. 

[Vlad401k]

The software that we're using, DATAIR, does not seem to have the option to test on dollar amounts. So, if the plan document states that each employee is in their own group (for Profit Sharing allocation purposes), and we give the same dollar amount to everyone, would you say it's fair to not run the General Test at all, because it's considered Design-Based Safe Harbor to allocate the same dollar amount to everyone?

 

Thanks.

[Mike Preston]

It is fair not to run the General Test because you know it will pass.  That does not make it a Design-Based Safe Harbor.

[Vlad401k]

Mike,

 

So would you agree that there is no need to run the General test if everyone gets the same dollar amount, even if the plan document states that every employee can get a separate allocation for Profit Sharing?

 

Let's say the plan has 2 participants, as per the original question. The NHCE has a higher compensation than the HCE (who owns 100% of the company). If they both get the same contribution, the General Test (tested on dollar amounts) would pass, even though if you tested General Test on percentages, it wouldn't pass. Would you agree that there is no need to run the General Test if the software provider does not have an option to run the test based on dollar amounts?

 

Thanks.

[Mike Preston]

It is fair not to run the General Test because you know it will pass.  That does not make it a Design-Based Safe Harbor.

[Mike Preston]

See 1.416-1-Q&A T-39 for a similar example dealing with top-heavy calculations.

[Bird]

You are essentially doing the general test in your head.  Don't be a slave to your software and its limitations.

[austin3515]

Correct me if I am wrong, but did MargeM not make the crucial point here?  You CAN give the lower paid HCE $5,000 and the higher paid NHCE $5,000 and still pass testing on the basis of allocations?

Safe harbor/not safe harbor might be the subject of my thesis in my pension Ph.D studies, but I just want to know what I can do for a client.

[austin3515]

How about this:  Younger Owner makes $50,000 and gets a 3% SHNEC for $1,500.  Older NHCE makes a $100,000 and gets $$3,000 SHNEC.

Sounds like I can do a PS contribution of $1,500 for the younger owner t get him or her a total of $3,000.

This might be the coolest thing I have learned on these boards in a year...  Probably not going to help very often, but really cool...