FAQ 580: Budget--Forfeitures allocated differently between budget and valuation calculations


Cross-tested profit sharing allocation with 2 groups, HCE and non-HCE, forfeitures added to source contribution for allocation - what determines whether ASC will allocate to the HCE's only and bump up the PS allocation for the non-HCE's to pass 401a4 or whether ASC will allocate outside the PS allocation?


You are correct that it is the same in terms of a4 testing since it includes contributions and forfeitures, but it is confusing because ASC does the calculation differently in the budget routine versus the valuation calculations. It looks as if the budget was run once as a cross-tested allocation and then another time as a regular allocation. It could also be that one run didn't have forfeitures in it. In any case, here is the explanation of the different calculations from the programmer:

The programmer argues (and he is correct) that the staff gets the same "total allocation", with the a4 test passing exactly the same either way, since a4 allocation rates are based on "contribution forfeiture". The Budget routine would design a staff contribution, for example, of 5% that is all contribution with no forfeiture, or the staff could get a 4% contribution and a 1% forfeiture with the Valuation routine ... and get the same a4 results. The problem with this is that clients do not like to see all the Forfeitures going to the HCEs.

The easiest workaround at this point is to code the forfeitures to reduce the contribution, and not allocate them at all. If you absolutely hate this, you can use another workaround also. First calculate the required Group 2 contribution in the Budget. Review the required percent for Group 2. Enter this rate *less* what the forfeiture percentage would be in the source 2 specs and run the valuation calculations. The forfeitures are then allocated among all participants. The combination of the contribution + forfeiture meets the a4 test.