Tiered profit sharing allocation?

[Richard Anderson]

In a tiered profit sharing plan can the contribtion allocation have the following three steps?

1. A flat dollar amount allocated to each eligible participant in the group that is descretionary (might be $300 one year, zero next year, $1,000 following year, ect.)

2. Any eligible participant in the group whose allocation in step one is less than 3% of compensation will receive an additional allocation such that the allocation for each eligible participant will be the greater of the amount from step one or 3% of compensation.

3. If any amount remains after step two, that amount will be allocated to each eligible participant in the group in the same proportion that each eligible participant's compensation for the year bears to the total compensation of all participants within the group for such year.

The main question I have relates to whether the flat dollar amount in step one can be discretionary, or must it be a fixed dollar amount specified in the document?

[Guest]

Hi Richard!

I think I have the same misgivings about step 1 as you seem to have. It sounds like you don't really have a definitely determinable formula in step 1.

or maybe, 'it smells funny, procede with caution'

[Richard Anderson]

Thanks, Tom and Hi back to you.

I'll state the dollar amount in step one in the document, and amend before year end if needed. That means I'll have to run a preliminary a4 test near year end in order to know the best amount for step one. What problems, if any, would there be with amending the formula often (maybe even annually).

Or, would this work?

Have the amount in step a low dollar amount such as $100, then give an initial contribution that fails the a4 test. Then amend within 9 1/2 months to increase the dollar amount in step one.