What is required for a contribution allocation formula in a retirement plan?

A contribution allocation formula in a retirement plan must be explicitly stated in the plan document to ensure clarity and compliance with regulations. This formal documentation serves several important functions: it outlines how contributions will be distributed among participants, ensures that all plan participants understand their benefits, and maintains transparency about the plan's operations.

Having the formula stated in the plan document also ensures that the formula meets ERISA requirements and provides protection against discrimination in favor of highly compensated employees. It establishes the rights and obligations of both the employer and the participants, creating a legally binding agreement regarding contributions.

While approval by the IRS, communication to employees, and informal verbal agreements may be relevant in some contexts, they do not fulfill the strict requirement that the contribution allocation be defined in a formal and accessible document. This clarity and documentation help prevent misunderstandings and disputes regarding contributions, which can arise if the terms are not properly articulated in writing.