Uniform Percentage of Pay (also known as Salary Ratio)Ī non-design based safe harbor plan is eligible for an abbreviated testing approach, due to being designed in a way that is less likely to be discriminatory than a more aggressive allocation method.Examples of uniform allocation methods 2 are: A design-based safe harbor plan is designed to demonstrate non-discrimination with a uniform method of allocating contributions. A safe harbor approach can be either design-based or non-design based. The easiest way a profit sharing contribution can demonstrate non-discrimination is to use a safe harbor approach. Non-Discrimination Requirementsįederal Tax Regulation §1.401(a)(4) prescribes that non-discrimination be demonstrated with either a safe harbor approach, or a rate group testing approach known as the General Test. Later on we’ll learn that comparable projected future benefits may not translate to equal present-day allocation rates. Benefits for HCEs derived from the projection of allocation rates to a stated age must be equivalent to such benefits derived for NHCEs at that same age.Allocation rates for Highly Compensated Employees (HCEs) must be equivalent to allocation rates for Non-Highly Compensated Employees (NHCEs), or.In the case of a DC Plan this means that either: IRC §401(a)(4) states that “A trust created or organized in the United States and forming part of a stock bonus, pension, or profit sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees 1.” Learn how a combination of cash balance and 401(k) plans can help business owners increase annual tax-advantaged retirement savings. Watch on-demand: Cash Balance and 401(k) Combination Plan Design Case Study This means that if the allocation method is changed via plan amendment after only a single participant has already accrued the right to the original allocation method, the change cannot take place until the next plan year, unless the change results in equal or greater allocations to all. Once participants accrue the right to share in allocations of the profit sharing contribution, they also accrue the right to the allocation method stated. Also specified in the plan document are the requirements to share in allocations of the profit sharing contribution for the given year. Once specified in the plan document, the allocation method can only be changed by a plan amendment or restatement. There are numerous allocation methods than can be used, but the four basic methods are: While the employer has discretion over making a profit sharing contribution, the method of allocating each plan participant’s share of any contribution made must be specified in the Plan Document. But profit sharing contributions no longer need to be made out of net profits and there are many reasons why an employer may choose to make, or not make, a profit sharing contribution. The choice is presumably driven by the year’s profitability, and in fact years ago employers could only make contributions out of net profits. Certain methods will better enable the business owner to control the cost of allocations to non-owners, while preserving desired allocations for owners and other executives.Ī Profit Sharing Plan is a Defined Contribution (DC) Plan that allows the plan sponsor (i.e., the employer) to choose each year whether or not to make a contribution. But in a more specific sense, there is flexibility in the way a profit sharing contribution can be allocated to different groups or classifications of employees. Many business owners interpret this to mean “I can’t contribute more for myself than I do for my employees.” In a general sense, this is true. Large body text: Most Profit Sharing/401(k) Plan sponsors have the basic understanding that the plan contributions must not discriminate in favor of the owners and other highly paid participants over non-owners and non-highly paid participants.
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