Chapter 7 - Allocation Methods

Question 1

IRC §401(a)(4) [nondiscrimination].

Answer 1

A qualified plan must provide contributions or benefits that do not discriminate in favor of HCEs. Because contributions or benefits (not both) must be nondiscriminatory, a qualified plan has several options for satisfying IRC §401(a)(4) [nondiscrimination].

Question 2

Cross Testing

Answer 2

Testing DC or DB plans on a benefits basis (instead of on a contributions basis) is called cross testing.

Question 3

Designed Based Safe Harbor Allocation Formulas

Answer 3

Uniform:

• Everyone is getting the same dollar amount of allocation or
• Equal to the same % of their compensation (IRC 414(s) comp), or
• Same amount of each unit of time for a week of work, not more than a week

Deemed uniform - referring to permitted disparity

Question 4

TWB (Taxable Wage Base) Table

Answer 4

Integration Level: Maximum Disparity Percentage:

Taxable wage base (TWB) ———————>5.7%
More than 80% but less than 100% of TWB —–> 5.4%
More than 20% but not more than 80% of TWB -> 4.3%
20% or less of TWB —————————-> 5.7%

Question 5

Integration level and new participants entering mid year?

Answer 5

It is not pro rated because the plan year is actually 12 months long.

Question 6

Benefits Based Testing generally favors?

Answer 6

Older employees

Question 7

New Comparability Plan

Answer 7

A new comparability plan gives the employer the discretion to determine the annual contribution level for each allocation group, but not over the manner in which contributions are allocated within each allocation group.

The manner in which the allocations are determined must be specified in the plan document.

New comparability formulas do not meet safe harbor requirements and must use general testing to satisfy nondiscrimination requirements.

Question 8

Integration Level and Pro Rating the Plan Year

Answer 8

If the plan year is a period of less than 12 months and plan year compensation is limited to that short period, the integration level must be prorated. The proration rule applies only when the plan year comprises
fewer than 12 months and the compensation period used to determine allocations for that short plan year is also less than 12 months.

Question 9

Designed based vs non designed based safe harbor

Answer 9

A pro rata allocation on compensation is a design-based safe harbor.

A design-based safe harbor must provide a uniform allocation.

A permitted disparity allocation is a design-based safe harbor.

Compensation from date of participation used for testing satisfies
safe harbor requirements.

A (uniform) points allocation is a non design-based safe harbor.

Question 10

Permitted Disparity

Answer 10

ESOP may not use permitted disparity as an allocation formula.