Employer contributions based on hour worked?

Is it permissible to have a DC plan in which employer contributions are a flat amount per hour worked? i.e., $2.50 per hour?  I can't find anything that specifically prohibits this approach, but I am not comfortable that it is allowed.  

Employer is trying to move away from a union pension with an hourly accrual rate. 

Thanks in advance!

You can allocate contributions on pretty much any rational basis that can past testing.  And to state the obvious the testing will be based on percentages of compensation. 

I had an ESOP years ago that allocated 25% of the contribution on Year of Service for Vesting over total Years of Service for Vesting.  The other 75% was on comp/comp.  It passed all the needed testing so the lawyers signed off on the idea. 

For a nonelective (not matching) contribution, there is a wide range of ways to allocate a contribution among participants’ accounts.

I’m not seeing how an allocation that is a uniform amount for each hour worked would discriminate in favor highly-compensated employees or introduce a new difficulty in meeting coverage and nondiscrimination conditions.

If the employer uses an IRS-preapproved document, you might check whether the desired allocation can be expressed within the adoption agreement’s contours or in some other way that does not lose reliance on the IRS’s preapproval (and does not contravene a collective-bargaining agreement).

For what it's worth, the Relius Cycle 3 adoption agreement provides an option for a fixed profit-sharing contribution in a fixed amount per hour:

[   ] Fixed dollar amount/hour. $ _____ per Hour of Service worked while an Eligible Employee.

This is one of the safe harbor allocation methods. If you want to use a preapproved document, make sure the document you're using has it as an option.

Quote

1.401(a)(4)-2(b)(2)(i) 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.

Coincidentally, I am just now reviewing a plan that came in for takeover. It is an IRS pre-approved Volume Submitter with an AA. Here's where it gets really strange - the allocation method falls under an election entitled, "Describe special rules for determining the allocation formula." It is then typed in: "The amount of such contributions to be allocated to the Accounts of each Employee who is eligible for Employer Contributions shall be a flat dollar amount or percentage of Compensation. Contributions may vary by each eligible class and/or employee, and shall be determined by the Employer."

Directly beneath this election is a (my emphasis) [Note: any special rules must be described in a manner that precludes Employer discretion and must satisfy the nondiscrimination requirements of Code 401(a)(4) and the regulations thereunder.]

I don't see how the allocation method satisfies the requirements of this Note, and there's no other election putting everyone in their own group, etc... am I missing anything? 

Was it a matter of there being no such question they *could* have answered as "individual groups", or did they just not find that question and tried to replicate that type of provision elsewhere in the AA?

No, the provision for everyone in individual group was in the same section - they had to go by it to get to this one. Clearly intentional.

5 hours ago, Belgarath said:

No, the provision for everyone in individual group was in the same section - they had to go by it to get to this one. Clearly intentional.

Obviously the TPA doesn't need it described this way (hopefully...); I would hazard that it's an attempt to make the Individual Allocation option more readable in the SPD.

Here's my concern. My understanding is that the "notes" in a pre-approved document are an integral part of the document and approval, and not merely "comments" that are purely informational. So in this case, does this provision make them lose reliance, such that they need to go through VCP?

At the very least, I'd have them amend the plan to a "normal" new comparability allocation election.

Belgarath, you’re right that stating a plan provision in a way that doesn’t follow an adoption-agreement form’s instructions loses reliance on the IRS’s preapproval.

Revenue Procedure 2017-41, 2017-29 I.R.B. (July 17, 2017) at its § 6.03(17) states: “Opinion letters will not be issued for . . . Plans that include blanks or fill-in provisions for the employer to complete, unless the provisions have parameters that preclude the employer from completing the provisions in a manner that could violate the [tax-]qualification requirements[.]”

No comment about whether an allocation fits the preapproved document you mention.

On 2/18/2022 at 10:39 AM, Belgarath said:

Here's my concern. My understanding is that the "notes" in a pre-approved document are an integral part of the document and approval, and not merely "comments" that are purely informational. So in this case, does this provision make them lose reliance, such that they need to go through VCP?

At the very least, I'd have them amend the plan to a "normal" new comparability allocation election.

Making a modification such that you lose reliance upon a pre-approved document's opinion letter is not an operational failure that requires correction through VCP.  It merely makes your document an IDP.  And, there is no requirement that a document be pre-approved or have received a determination letter at all, only that it incorporate the required regulatory/legislative items in a timely manner.  It may be prudent that a lay-Sponsor use a pre-approved document, or obtain a determination letter, but neither is a qualification requirement.  Here, you would only have an operational failure if the administration of that modification resulted in a regulatory violation.

Haven't done one for several years, but don't Davis Bacon plans allocate contributions in this manner?

PNJ

After a detour, we’ve now come full circle; kmhaab’s originating post mentioned why the plan’s sponsor desires the provision asked about:

“Employer is trying to move away from a union pension with an hourly accrual rate.”