Double Discretion and §1.401-1(a)

[Guest MFuentes]

Let's say a plan sponsor of a profit sharing plan has elected a discretionary provision in her plan with a pro-rata on comp allocation formula. If she can afford it she makes a contribution but if she can't then she won't. I know Treas. Reg. §1.401-(a) isn't violated and the service doesn't have a problem (last I heard) with this election.

Now let's say the plan is a 401(k) plan with a match. The match contribution requirement is discretionary as in the profit sharing plan. But the allocation formula is 10% of salary deferrals up to a discretionary percent of eligible compensation.

Does this "double discretion" violate the "definite formula" provision of Treas. Reg. §1.401-1(a)(2)(ii)? If so, is there a correction available?

[Guest ERISAweasel]

My understanding is that "double discretion" fails to meet the "definitely determinable" requirements and therefore would not be an acceptable formula in a qualified plan.

To the extent the plan document provided for such non-definitely determinable formula, it would be a "form" defect as opposed to an "operational" defect. It would seem one option would be to go Walk-in CAP (initially on a "John Doe" basis) and propose a reformatory amendment that codifies actual practice and sufficiently ties down the allocation method such that it becomes definitely determinable (probably easiest to hard-code the cap on percentage of salary matched).

[Guest]

somewhere in the back of my poor thick skull I recall you could actually do this- discretionary match and discretionary ps. but heck if I could cite you anything. at least at this time. hopefully someone else might remember

[Richard Anderson]

If the formula in the document is 10% with a discretionary cap, I think that is acceptable. But, if the document has a discretionary percentage match of deferrals and also allows a discretionary cap as a percentage comp, then you don't have a definitely determinable formula. If you want to use a cap, then I think that either the cap % or the match % must be stated in the document.