-11(g) to Integrate at 50% of Wage Base

Can we do an -11(g) amendment to change profit sharing allocation method from each in own group, to an integrated allocation with the allocation at 20% of the taxable wage base?

Yes, and no.  An -11(g) amendment must be additive.  If you are comfortable with the allocation prior to the -11(g) is zero then as long as the -11(g) benefits satisfy the -11(g) requirements, it works.  Did you mean 20 or 50?  

I'm not sure what you mean.  It is probably true that the allocation was so awful that they wouldn;t do it wihtout the 11g. Is that what you mean?

20 / 50, whatever. Are we available to treat it as a design-based safe harbor via an -11(g). That's the real crux of it.

So you want to change to a formula that doesn't satisfy the general test but would satisfy a design-based safe harbor?  I'd say no, but that's just a gut reaction.  I imagine there is no cite saying you can do it, just an interpretation that says nothing prevents you, but I'd be uncomfortable trying to sell it to an auditor.

(How bad could a pro-rata allocation be vs integrated?)

When the owner makes more than the employee but is under the wage base, it makes a "big" difference.  I have the exact same gut reaction... 

if you do the allocation in that fashion, declare those amounts as the individual allocations, and then general test on contributions with permitted disparity, does that get you where you need to be? or if permitted disparity must be imputed at the SSWB that makes it not work?

I think CuseFan has hit on the problem.  It won't pass testing using 100 % of TWB.  And since it is not in the plan, accept by 11(g) amendment, I don't think it qualifys as a design based safe harbor.

I'm inclined to agree, but it would be awesome to point something that proves the point...  I skimmed through the 401l regs and it does not specify that the it has to be in the document on the last day of the year.  Just that it has to be in the document (and it would be).

6 hours ago, austin3515 said:

I'm not sure what you mean.  It is probably true that the allocation was so awful that they wouldn;t do it wihtout the 11g. Is that what you mean?

I have no idea what the above is saying so I don't think it is what I mean.

20 / 50, whatever. Are we available to treat it as a design-based safe harbor via an -11(g). That's the real crux of it.

As far as this goes, I never mentioned the use of an -11(g) amendment structured as a design-based safe harbor.  You would have to slog through -11(g) to confirm but the language there certainly seems to allow it. See -11(g)(3)(v)(A) and (B).

From a prospective point of view, I don't see a problem.  I'm sure we've all amended plans (Money Purchase, Profit-Sharing, etc.) in the past.  Timing is everything, as they say. 

Speaking again from a prospective point of view, what's wrong with amending a PS formula to another option that's presumably one of the pre-approved ones?  My FT William doc can accommodate a 0-100% of TWB integration with appropriate reductions of integration percentages.

2 hours ago, imchipbrown said:

From a prospective point of view, I don't see a problem.  I'm sure we've all amended plans (Money Purchase, Profit-Sharing, etc.) in the past.  Timing is everything, as they say. 

Speaking again from a prospective point of view, what's wrong with amending a PS formula to another option that's presumably one of the pre-approved ones?  My FT William doc can accommodate a 0-100% of TWB integration with appropriate reductions of integration percentages.

Chip, the inherent nature of an -11(g) amendment is that it is NOT prospective.  It is intended to be retroactive.

Yeah Mike, agreed.  It wasn't clear from the question as to what year he was talking about.

Yes, it was. 

Props to Mike Preston for this one!

B) Corrective amendment to conform to safe harbor. The requirements of paragraph (g)(3)(v)(A) of this section need not be met if the corrective amendment is for purposes of conforming the plan to one of the safe harbors in §1.401(a)(4)-2(b) or §1.401(a)(4)-3(b) (including for purposes of applying the requirements of those safe harbors under the optional testing methods in §1.401(a)(4)-8 (b)(3) or (c)(3)), or ensuring that the plan continues to meet one of those safe harbors.

From §1.401(a)(4)-2(b)(2)(ii)

(ii) Permitted disparity. If a plan satisfies section 401(l) in form, differences in employees' allocations under the plan attributable to uniform disparities permitted under §1.401(l)-2 (including differences in disparities that are deemed uniform under §1.401(l)-2(c)(2)) do not cause the plan to fail to satisfy this paragraph (b)(2).

Does any shadow of doubt remain that this can be done??

Wow, couldn't be much clearer.

This absolutely can be done and you now have the references. 

HOWEVER, this started out with a plan that has each person in their own group.  When you make the contribution, you need to declare how much is being made for each group (person).  If you do that in a way that the allocations are meeting non-discrimination by being an allocation that meets the normal safe harbor "integration" rules, then you don't even do an amendment!!!!

Why are we talking about -11g amendments in this case? All we need is the allocation by group that meets the safe harbor integration rules. Has everyone walked past the point of the question?  What am I missing?????

I didn;t want to integrate at 100% of the wages base, i wanted to use 50%.  So the owner makes $100,000 for example, and the employee makes $40,000.  I want to integrate at say 40% of the wage base.  This method of allocating contributions will be much more advantageous for the owner than merely imputing disparity at the taxable wage base (I think you will agree based on my example that imputing disparity does nothing).

You can do that (though your original posting says 20%); at 50% of the taxable wage base your integration percentage if 4.3%. So long as you do your allocation to the groups on that formula, you still don't need an 11-g amendment.  You can show that you met that allocation method if you ever need to prove non-discrimination. And no matter what percentage of the TWB you use, so long as you use the corresponding integration percentage, you can still using your groups without any amendment.

Larry-

That allocation will not satisfy rate group testing, so I'm confused as to why I would not need the -11(g)?  The whole point of the -11(g) is to utilize the design based safe harbor and avoid the general test under (a)(4) altogether.

Huh?  If you pass a design based allocation (which it would be), you don't use rate groups? The purpose of a -11g amendment is to allocate additional benefits in such a was as to PASS the general test.  You have it backwards.  If you allocation to the groups meets a regular integrated formula using the appropriate allocation percentage that goes with the percentage of the TWB that you are using as your integration level, you don't need to do anything else.

If I hear you correctly, as long as my allocation is based on a safe harbor design based allocation, it doesn't matter if the document specifies that allocation?  I can just use the fact that everyone is in their own group to do the desired allocation, and then claim exemption from testing because the allocation was based on a safe harbor integrated allocation?

If that's what you're saying it would not be correct.  The 401l rules clearly require that it has to be written into the Plan.

If that's not what you're saying then color me confused.

Austin: You say the rules "clearly" require that it has to be written into the plan.  How about a cite for that?  I can't seem to find it.

Will you settle for a "because I said so"?  I don't have time to look it up but the IRS has been quite clear as to the requirement.  Trust me. 

A) Integration level

(i) In general

The term “integration level” means the amount of compensation specified under the plan (by dollar amount or formula) at or below which the rate at which contributions or benefits are provided (expressed as a percentage) is less than such rate above such amount.

§1.401(a)(4)-2   Nondiscrimination in amount of employer contributions under a defined contribution plan.

(ii) Permitted disparity. If a plan satisfies section 401(l) in form [Note: NOT operation], differences in employees' allocations under the plan attributable to uniform disparities permitted under §1.401(l)-2 (including differences in disparities that are deemed uniform under §1.401(l)-2(c)(2)) do not cause the plan to fail to satisfy this paragraph (b)(2).

That oghta do it for you?

IAWMP and austin.  A plan can satisfy a safe harbor that would not actually pass the general test, but these SH allocations (or DB benefit formulas) need to be stated in the plan to use the design-based SH.  If you don't have a design-based SH allocation in the plan, you have to pass the general test.  Duplicating the results of a designed-based SH is not equivalent to passing the general test.  

Not ready to buy it yet.  The first does example does not do it at all. Yes, that is the definition of integration level in the plan, but that has nothing to say about showing that a particular allocation "scheme" meets a given integration formula that is acceptable (without a definition in the plan of integration level).

The second one is only a little more troubling than the first. I think I need Mike's reference at some point to be convinced, only because it is quite possible for IRS to take the position (on a plan with each person in their own group) that an allocation meeting the equivalent of a properly integrated plan formula is non-discriminatory.  I need to see where it says that such an allocation DOES NOT meet non-discrimination.

In fact, this quote from an earlier posting:

       From §1.401(a)(4)-2(b)(2)(ii)

                  (ii) Permitted disparity. If a plan satisfies section 401(l) in form, differences in                       employees' allocations under the plan attributable to uniform disparities                                permitted under §1.401(l)-2 (including differences in disparities that are                                  deemed  uniform under §1.401(l)-2(c)(2)) do not cause the plan to fail to                                satisfy this paragraph (b)(2).

could be read to say exactly what I am saying. The allocation meets the rules IN FORM (in the form of the allocation) and therefore does not fail a4.

Mike?

"In form" has always meant "there is a specific plan provision".

17 minutes ago, Mike Preston said:

"In form" has always meant "there is a specific plan provision".

Yes,  from the legal dictionary at thefreedictionary.com:

Form

The expression form of the statute signifies the language or structure of a statute, and, therefore, the restriction or command that it might include, as used in the phrase in criminal Pleading "against the form of statute in that case made andprovided."A matter of form, as distinguished from a matter of substance—with respect to pleadings, affidavits, indictments,and other legal instruments—entails the method, style, or form of relating the applicable facts; the selection or arrangement of terms; and other such matters without influencing the essential sufficiency or validity of the instrument, or without reaching the merits.

[emphasis added]

42 minutes ago, Mike Preston said:

"In form" has always meant "there is a specific plan provision".

All right, but I still really need to see something that says you CAN'T do this.  You said the IRS has specifically said that?  Any chance of find that; my search was fruitless.

Larry, in case you missed it, here it is again:

      From §1.401(a)(4)-2(b)(2)(ii)

                  (ii) Permitted disparity. If a plan satisfies section 401(l) in form, differences in                       employees' allocations under the plan attributable to uniform disparities                                permitted under §1.401(l)-2 (including differences in disparities that are                                  deemed  uniform under §1.401(l)-2(c)(2)) do not cause the plan to fail to                                satisfy this paragraph (b)(2).

Austin; how could I miss it?  I included it in my own posting an hour ago. In the immediate prior post to yours I said what I am still looking for; something that says what I am saying is NOT ACCEPTABLE. The other are the opposite: they are examples of what is acceptable but they do not include language that say they are the exclusive means of meeting those tests.

3 minutes ago, Larry Starr said:

Austin; how could I miss it?  I included it in my own posting an hour ago.

So now you understand my sense of humor :)

Your question is "Where does it say that the integrated allocation has to be written into the Plan."

That reg says precisely that it must be in writing. Precisely.  How many trainings have we been to and been told that a plan must be qualified not only in FORM but operation?

Well, in -2 the regs say the plan must pass either design-based SH or general test.  Under the SH language it talks about how the "plan" must allocate, with no explicit mention of the document or "form".  But it goes on to say that certain plan provisions will not violate the SH if they meet the requirements of -2(b)(4).  One of these is "multiple formulas".   Do you agree that a plan that provides for an employer determined allocation separately for each participant has multiple formulas?  If so then the plan would have to meet these requirements.  Typically a plan would not so provide.   This is over and above the specific reference to form on the integrated allocation, to apply to any design based SH, such as a points allocation. 

Quote

(vi)Multiple formulas -

(A)General rule. The plan provides that an employee's allocation under the plan is the greater of the allocations determined under two or more formulas, or is the sum of theallocations determined under two or more formulas. This paragraph (b)(4)(vi) does not apply to a plan unless each of the formulas under the plan satisfies the requirements of paragraph (b)(4)(vi) (B) through (D) of this section

 

I think the logic works something like this: (a) To satisfy the safe harbor one must have a document provision that lays out the allocation (by definition, no plan that has everybody in their own groups with completely discretionary allocations to each individual can ever, EVER, satisfy the safe harbor). (b) In order to satisfy the general test one can utilize permitted disparity but only as specifically allowed in the general test rules under a4 (which you can find at a4-7). a4-7(b)(4)(ii) allows only one rate (it has always been 5.7%).  There is no provision to use anything other than the 100% rate (5.7%).  Never has been.

Yes, Mike boils it down to the essence.