Pro-Rated Profit Sharing Contribution

[Benefits Vet]

ER uses a uniform formula for allocating profit sharing contributions. The formula utilizes various classes of employees based on years of service. The ER wants to further prorate each employee's share by the number of weeks in the year that the employee is actively employed. Is this what is intended to be allowed under 1.401(a)(4)-2(b)(2)?  If not, is there another basis for allowing the proration? THANKS!

[Larry Starr]

23 minutes ago, chibenefits said:

ER uses a uniform formula for allocating profit sharing contributions. The formula utilizes various classes of employees based on years of service. The ER wants to further prorate each employee's share by the number of weeks in the year that the employee is actively employed. Is this what is intended to be allowed under 1.401(a)(4)-2(b)(2)?  If not, is there another basis for allowing the proration? THANKS!

Your talking about this language I believe:

(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.

Though I have never (EVER) seen such an allocation, I believe the intent is that a uniform dollar amount PER WEEK OF SERVICE) is what this anticipates.  So, if you figure out the total of all the weeks of all the participants, and divide the allocation by that number of weeks, you then allocate to each person the result of that calculation times the number of their own weeks.  You have eliminated any connection to compensation.

Now, since in your plan you are first dividing them up by groups before doing this, I don't think you qualify under this safe harbor because you are first doing the group thing, which automatically throws you out of the safe harbor rules.

 While you may be able to do this, you are going to be subject to all the non-discrimination testing rules; this will not ever be a safe harbor (IMHO).

[Benefits Vet]

2 minutes ago, Larry Starr said:

Your talking about this language I believe:

(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.

Though I have never (EVER) seen such an allocation, I believe the intent is that a uniform dollar amount PER WEEK OF SERVICE) is what this anticipates.  So, if you figure out the total of all the weeks of all the participants, and divide the allocation by that number of weeks, you then allocate to each person the result of that calculation times the number of their own weeks.  You have eliminated any connection to compensation.

Now, since in your plan you are first dividing them up by groups before doing this, I don't think you qualify under this safe harbor because you are first doing the group thing, which automatically throws you out of the safe harbor rules.

 While you may be able to do this, you are going to be subject to all the non-discrimination testing rules; this will not ever be a safe harbor (IMHO).

I have never seen it before either. I don't know why they want to do it.