Definitely Determinable Allocation Groups (Posted November 8, 2004) Technical Tip 132: The following question and answer were from the IRS Q&A Session at the 2003 ASPPA Annual Conference: A profit sharing plan provides that the discretionary employer contribution is to be allocated among the members of each allocation group proportionately based on the ratio of each participant’s compensation to the compensation of all participants who are in the allocation group. Each individual participant is his or her own allocation group. a. Does this allocation formula satisfy the requirement that the allocation formula be definitely determinable pursuant to Regulation Section 1.401-1(b)(1)(ii)? b. What procedures need to be followed by a plan sponsor and do they need to be reflected in the plan document? c. Can contributions be made to a plan "holding" account during the year? Response: A plan design does not violate the requirement that the formula be definitely determinable solely because the employer has the discretion to determine the amount of the contributions to be allocated to particular groups of employees defined under the plan, and the plan specifies the method for allocating these amounts among the employees within each group. The number of employees within each group is immaterial provided that each group is identifiable under the plan, and the identity of the employees within each group is not subject to employer discretion. It is immaterial that the purpose of forming the groups is to satisfy the cross-testing requirements under Reg. 1.401(a)(4)-8. Although the plan can provide for employer discretion to determine the amount of employer contribution to be allocated to each group, the employer must notify the trustee, in writing, of the amount of contributions for each group. In conclusion, the formula described is definitely determinable pursuant to Reg. 1.401-1(b)(1)(ii). View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.