What is the correct method for determining the total amount to be distributed when using the leveling method?

The leveling method focuses on equitably distributing amounts among Highly Compensated Employees (HCEs) based on the percentage of their deferral amounts rather than just the dollar amount. This approach ensures that those who have a higher salary defer a larger percentage of their paycheck, maintaining fairness among participants while adhering to nondiscrimination rules under 401(k) regulations.

By starting with the HCE who has the highest percentage deferred, the leveling method effectively targets the intent to distribute funds proportionally based on contribution level relative to income. This method helps mitigate the risk of exceeding the contribution limits imposed on HCEs, as it keeps the percentage-based contributions in line with ERISA guidelines.

In contrast, focusing solely on the highest dollar amount deferred may lead to skewed distributions that do not consider the earnings ratio among HCEs. Calculating distributions based on employee tenure or through random selection does not align with regulatory requirements for equitable treatment and could create potential compliance issues. Using percentages ensures a methodical and equitable approach when determining distributions among HCEs in the context of a 401(k) plan.