Term
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Definition
| An age-weighted plan allocates the employer contributions and forfeitures on the basis of the normalization factors used to determin EBARs under the cross-tesing method. Each participant's allocation is based on his or her share of the total normalization factors of all participant's allocaiton is based on his or her share of the total normalization factors of all participants. This type of plan is designed with the intention of using general testing. |
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Term
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Definition
| "A participants allocation rate is expressed as a percentaqge, determined by dividing the amount allocated by the participant's IRC 414(s) compensation. The allocation rates used for this test cannot be adjusted by imputing permitted disparity." |
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Term
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Definition
| Base compensation means plan year compensation up to the integration level. |
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Term
| Base contribution percentage |
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Definition
| The base contribution percentage is the portion of the contribution (expressed as a percentage) that is allocated on base compensation. |
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Term
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Definition
| "The regulations do not require a plan to pass the minimum allocation gateway, so long as each allocation rate can meet the broadly available test. The broadly available test essentailly treats each allocation rate in a manner similar to the way benefits, rights, or features (BRFs) are treated under Treas. Reg. 1.401(a)(4)-4. " |
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Term
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Definition
| "Under the permitted disparity formula, the contribution is allocated proportionate to the sum of the paln year compensation and the excess compensation (referred to as combined compensation)." |
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Term
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Definition
| "The customary way of examining nondiscrimination in a defined contribution plan is to examine the contribution rates of particiapnts. If a defined contribution plan uses the benefits basis analysis to determine nondiscrimination, it is called cross-tested. Plans that use this method are also called new comparability plans. " |
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Term
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Definition
| A design-based safe harbor plan is deemed to provide nondiscriminatory contributions because the allocation formula is designed to produce uniform allocation rates (or rates that are deemed to be uniform). |
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Term
| Equivalent benefit accrual rate (EBAR) |
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Definition
| "To determine rate groups, a defined contribution plan first must express each participant's allocation of employer contributions and forfeitures as an allocation rate or an equivalent benefit accrual rate (EBAR)." |
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Term
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Definition
| Compensation in excess of the integration level. |
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Term
| Excess contribution percentage |
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Definition
| "The excess contribution percentage is the portion of the contribution (expressed as a percentage) that is allocated on excess compensation (i.e., compensation in excess of the integration level)." |
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Term
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Definition
| "Under the minimum allocation gateway, the lowest permissible allocation rate for any NHCE who benefits under the plan is one-third of the highest allocation rate for any HCE who benefits under the plan. This is also referred to by practitioners as the one-third test. However, if the NHCE receives an allocation that is no less than 5 percent of IRC 415 compensation, the gateway is deemed satisfied. This is referred to by practitioners as the 5 percent test. Thus, for plans that generally provide an allocation to all eligible NHCEs that equals or exceeds 5% of compensation, the gateway test are not an issue." |
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Term
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Definition
| "Amended regulations require defined contribution plans to meet a gateway test as a precondition to demonstrating satisfaction with IRC 401(a)(4) on a benefits basis (i.e., through cross-testing). This is referred to as a gateway test, because the plan firswt has to meet this requirment before being permitted to enter into cross-tesing, as if this precondition was the gate that opens the cross-testing door. " |
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Term
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Definition
| "In simplest terms, general testing is a method of demonstration that plan allocations or plan benefits are nondiscriminatory by dividing employees into rate groups, and then analyzing each rate group separately." |
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Term
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Definition
| "Imputing permitted disparity means the plan is relying on the general test under the IRC 401(a)(4) regulations to show the plan is nondiscriminatory, and is adjusted the allocation rates or benefit rates used in that test to take into account employer-provided Social Security contributions or benefits. " |
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Term
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Definition
| The integration level may be the taxable wage base or any specified amount less than the taxable wage base. |
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Term
| Maximum disparity allowance |
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Definition
| The Maximum disparity allowance is the maximum difference between allocations on compensation above the taxable wage base and allocations on compensatoin that is less than the taxable wage base that can be provided without violating the IRC 401(1) safe harbor. |
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Term
| Maximum disparity percentage |
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Definition
| "The maximum disparity percentage depends on the integration level, and how it compares to the taxable wage base in effect at the beginning of the plan year. The maximum disparity percentage is determined under a defined table. " |
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Term
| Minimum allocation gateway |
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Definition
| "Under the minimum allocation gateway, the lowest permissible allocation rate for any NHCE who benefits under the plan is one-third of the highest allocation rate for any HCE who benefits under the plan. This is also referred to by practitioners as the one-third test. However, if the NHCE receives an allocation that is no less than 5 percent of IRC 415 compensation, the gateway is deemed satisfied. This is referred to by practitioners as the 5 percent test. Thus, for plans that generally provide an allocation to all eligible NHCEs that equals or exceeds 5% of compensation, the gateway test are not an issue." |
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Term
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Definition
| "The customary way of examining nondiscrimination in a defined contribution plan is to examine the contribution rates of particiapnts. If a defined contribution plan uses the benefits basis analysis to determine nondiscrimination, it is called cross-tested. Plans that use this method are also called new comparability plans. " |
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Term
| Nondesign-based safe harbor |
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Definition
| "There is only one type of defined contribution plan that is a nondesign-based safe harbor plan: the uniform points plan. This plan design requires annual testing of the contributions to show IRC 401(a)(4) is satisfied, but the testing method is simpler than the general testing method used for non-safe harbor plans. The allocation method under a uniform points plan does not satisfy the design-based safe harbor, because the allocation is determined with reference to factors other than compensation. Therefore, by design, the allocations cannot satisfy the uniform allocation requirement for design-based safe harbor plans. The nondesign-based safe harbor is not available to ESOPs. " |
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Term
| Normalizing the benefit (normalization) |
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Definition
| "EBARs are determined by expressing the allocation as an annual benefit payable as a single life annuity at the employee's testing age. This process is known as normalizing the benefit. Under the normalizing process, contributions are projected to normal retirement based on an assumed rate of interest (by multiplying them by an actuaial factor), and then that normal retirement lump sum is converted to a monthly benefit payable for the participant's lifetime (by being multiplied by a normalization factor)." |
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Term
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Definition
| "Under the minimum allocation gateway, the lowest permissible allocation rate for any NHCE who benefits under the plan is one-third of the highest allocation rate for any HCE who benefits under the plan. This is also referred to by practitioners as the one-third test. However, if the NHCE receives an allocation that is no less than 5 percent of IRC 415 compensation, the gateway is deemed satisfied. This is referred to by practitioners as the 5 percent test. Thus, for plans that generally provide an allocation to all eligible NHCEs that equals or exceeds 5% of compensation, the gateway test are not an issue." |
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Term
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Definition
| Permitted disparity is the term used in IRC 401(1) for considering the employer's contribution to Social Security on behalf of a plan participant in determining whether the contributions or benefits under a qualified plan are nondiscriminatory. |
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Term
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Definition
| "Once the allocations are converted into allocation rates or EBARs, the rate groups are then identified by reference to the rate of each HCE. An HCE's rate group includes all employees (HCEs and NHCEs) who have a rate equal to or greater than the HCE's rate. " |
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Term
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Definition
| "The taxable wabe base is the maximum amount of wages that are considered for Social Security purposes. The taxable wabe base is adjusted each calendar year. For example, the taxable wage base is $106,800 for 2009. If the plan year is not a calendar year, the taxable wage base in effect at the beginning of the plan year is used." |
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Term
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Definition
| "The testing age is usually the normal retirement age specified in the plan, unless that age is not a uniform normal retirement age. " |
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Term
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Definition
| "A cornerstone of the design-based safe harbor plan is that the method of allocating the employer contributions must be one that provides a Uniform Allocation, either as a percentage of compensation or a dollar amount. The same allocation formula must apply to all employees." |
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Term
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Definition
| "A uniform points plan uses a pro rata allocation formula, but the formula is based on a participant's points, rather than compensation. Points must be granted for service and/or age. " |
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