Fixed $ P.S. contribution OK?

[Guest KBU]

A sponsor with a cross-tested P.S. plan wants to make a "one time" P.S. contribution of $1,000 per eligible employee (10). This would be in addition to a $50,000 annual contribution subject to the cross-tested formula. On the surface, I see no problem with this since it is not discriminatory. Anyone see it differently?

[Bill Berke]

So if my math is correct, your client is going to contribute/deposit $150,000. This is the amount that must be allocated in accordance with the plan's formula and I suggest you preliminarily allocate this total. If the test allocation doesn't work to the client's satisfaction while complying with 401(a(4), 404 and 415, then you may have to amend the plan's allocation formula if you can still do so under the rules and specific client facts.

[david rigby]

My math is a little different. I interpret the facts as creating a $60,000 contribution.

It seems to me that contributing an additional/extra $x per participant is not going to be discriminatory, but you might need to amend the allocation formula in the document to accomplish this. Also, as Bill states, watch out for 415, etc.

[Guest KBU]

My apology. The F2000 ('99 Tax Year) contribution would be $10K, or $1K per each of ten employees. Then next year, F2001 (2000 Tax Yr.) they would make a $50K contribution subject to a cross-tested formula. I guess the real question is whether or not they can deviate from the formula in the plan document for this year's contribution. Certainly appears feasible to me since all eligibles treated equally. Appreciate your feedback.

[Disco Stu]

I would agree with the previous posts, that the $$/participant formula would likely not be discriminatory, but you still have to allocate contributions according to the terms of the plan. If your plan doesn't say you can allocate a contribution in this fashion, you shouldn't do it without an amendment.

You'll then be amending the plan again next year when you want to change the allocation formula back to your cross tested formula.

[Bill Berke]

To reiterate and emphasize what has been said by everyone above - read the document. You cannot deviate from the written formula. The plan must be operated in accordance with the document. If the current formula doesn't work, then you must amend. It is permitted to amend with two formulas (formulae?) simultaneously - one effective in year x, the other effective in year x + 1.

[Guest KBU]

Thanks, pax, Disco Stu, and Bill for your input. Really helps.

[pjkoehler]

KBU, be aware that the nondiscrimination rules are not the only potential spoil sport here. The general qualification rules require that a profit sharing plan provide a definite predetermined formula for allocating contributions to the participants. Reg. Sec. 1.401-1(B)(1)(ii). If the plan is not amended before the end of the 1999 Tax Year to permit a separate discretionary employer contribution that is subject to a per capita allocation method (employer contribution divided by number of plan participants), you could run afowl of the "definite predetermined formula" rule even if the allocation turns out to be nondiscriminatory. The IRS has concluded in at least one PLR that an amendment to the allocation formula in a profit sharing plan adopted after the end of the plan year for which contributions were made violated the anti-cutback rule of Sec. 411(d)(6). PLR 9735001.