Is there any reason not to provide that each participant is a distinct allocation group?

In another BenefitsLink discussion, the originating inquirer described a plan sponsor’s desire to change to a regime under which each participant is a distinct allocation group.

Instead of asking about how to make such a change, I ask different questions:

(Assume that no nonelective contribution will be a subterfuge for what really is an individual’s § 401(k) cash-or-deferred election.)

Does ERISA’s title I or the Internal Revenue Code impose any constraints on a plan sponsor’s opportunity to specify that each participant is a distinct allocation group?

For those plan sponsors that use IRS-preapproved documents to state the user’s documents, do the documents available from mainstream providers impose any constraints on a plan sponsor’s opportunity to specify that each participant is a distinct allocation group?

Assume an employer has enough practical capacity to decide, allocate, and communicate a distinct contribution for each individual.  Are there other reasons a plan sponsor would not want the flexibility to specify that each participant is a distinct allocation group?

Peter, I've not found a good reason NOT to have everyone in their own group for allocation purposes.

No.

If a plan sponsor does not want to have to test their allocations under the general test of 1.401(a)(4)-2(c) then they must use one of the design-based safe harbors. Generally this is not a big deal as most allocations which would satisfy one of the design-based safe harbors would readily satisfy the general test.

An allocation formula which includes permitted disparity at an integration level less than 100% of the taxable wage base is an acceptable design-based safe harbor under 1.401(a)(4)-2(b)(2)(ii) and 401(l)(5)(A)(ii) which requires that the integration level "not exceed" the TWB. However it is not permissible to use anything other than the full taxable wage base when imputing permitted disparity on the general test under 1.401(a)(4)-7(b). Therefore a contribution allocated in this manner is not guaranteed to automatically satisfy the general test. A sponsor who wishes to allocate their contributions in this manner might prefer to rely on the design-based safe harbor.

Thank you for the nice help.

If an allocation group has only one participant, an allocation formula results in the participant sharing in 100% of the discretionary contribution made for her allocation group.

So, the practical control is deciding the discretionary contribution for each group-of-one.

Is it enough that an employer decides a contribution by paying it?

Or must an employer do some other written act before paying a contribution?

Agree no reason not to use individual groups. I believe there was conversation within the last month or two concerning documentation for allocations. I noted that in an IRS audit the agent asked for a copy of the memo that authorized the allocation amounts/percentages to each respective group.

I believe a number of people noted their practice was to have the employer/plan administrator execute a simple memo authorizing the contributions as presented in the attached schedule (which shows the individual allocations as determined by the RK/TPA or whoever).

6 hours ago, Peter Gulia said:

Or must an employer do some other written act before paying a contribution?

don't have it handy at the moment, but there is the IRS memo from 1998 that says it shall be in writing.  I don't believe it says before, and we can probably come up with 20 reasonable interpretations of "written"

Thank you for the further help.

What if there are 32,000 participants?  Instead of a paper list of 32,000 names and amounts, could the schedule of discretionary contributions be a computer’s save of the employer’s accounting records that show, for each individual, her supervisor’s decision with a human resources officer’s approval?

The online internal revenue manual indicates that the written instruction which admittedly can be virtually anything, must be signed on or before the date which a contribution is deducted. That can be many months after the allocation.

9 hours ago, Mike Preston said:

The online internal revenue manual indicates that the written instruction which admittedly can be virtually anything, must be signed on or before the date which a contribution is deducted. That can be many months after the allocation.

Thanks Mike!

We are cobbling together the full picture here ?

As I recall (but since I retired practically everything about pensions has vanished from the mind, thank goodness, so I may be fuzzy on this), if everyone is in their own group the IRS considers that as 'by name'. Therefore, to pass coverage you can only use the ratio % test. While that shouldn't be a problem, keep it in mind.

With thanks for everyone helping me, here’s the LRM.

Defined Contribution Listing of Required Modifications and Information Package (Oct. 2017) https://www.irs.gov/pub/irs-tege/dclrm1017redlined.pdf

From LRMs #94 [pages 127-130]:

The employer will specify in written instructions to the plan administrator or trustee, by no later than the due date of the employer’s tax return for the year to which the employer’s contribution relates, the portion of such contribution to be allocated to each participant allocation group.  The employer contributions allocated to each participant allocation group will be allocated among the employees in that group in the ratio that each employee’s compensation, as defined in section n.nn of the plan, bears to the total compensation of all employees in the group.  In the event that an eligible employee is included in more than one participant allocation group, the participant’s share of the employer contribution allocated to each such group will be based on the participant’s compensation for the part of the year the participant was in the group.

Just a small addition to this discussion:  Both of the Pre-Approved document providers we use at our firm offer this option in the Adoption Agreement.  Our administrators prefer it (if there is  Non-Elective) because if the flexibility.