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Protected Benefit issue


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We have a 401(k) plan that currently has allocation conditions on the PS contribution of 1000 hours and also has a last day requirement. They currently use full year compensation to determine the allocation for first-year participants and they have semi-annual entry dates. They want to retroactively amend the plan back to the first day of the current plan year (January 1, 2008) to remove the 1000 hour and last day requirement, and also change first-year compensation to be from date of entry instead of full year. I know amending out the 1000 hours and last day requirement is no problem, but is it okay to change the first-year compensation to date of entry or is that a violation of the protected benefit rules?

You cannot change an allocation formula if a participant has already earned the right to receive it and I know that by having a last day requirement, nobody earns the right to receive the contribution until the last day of the plan year, so in this case, if the answer to my first question is yes (definition of compensation is a type of protected benefit) then is amending the compensation definition okay because the plan has that last day requirement? What about the fact that we're amending the last day requirement out in the same amendment? Is that okay too?

In general, is the definition of compensation even part of the 'right to receive the allocation formula' rule? (For example, in a plan that doesn't have a last day requirement.)

Hopefully, I've made that clear.

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Just thinking aloud... if you have semi-annual entry dates, then it would only apply to the people who will be entering on July 1st (right?). They haven't entered the plan yet so they haven't acquired any rights yet?

I wonder if there's there any reason against making the amendment future dated but still before year end? For example June 30th, the day before the mid-year entry?

Those aren't suggestions... just thoughts to add to the mix.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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My original thinking was that an employee earns the right to receive his contribution on his full year compensation on the first day of the plan year even though he doesn't enter the plan until later in the year and so the amendment would need to be done before the first day of the plan year. But I see your point that he hasn't earned any rights until he actually becomes a participant, so if the amendment is done before he becomes a participant, it might be okay.

I'm hoping that either your point is correct or the fact that this plan has a last day requirement will be our saving grace.

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If no PS contribution has been made during the current plan year (other than perhaps one made early in the year and specifying that it was made for last year), then no one should have any accrued right as whether to make the contribution or not is most likely discretionary with the employer--check your plan document.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Perhaps I misunderstand the question. Is masteff's response implying that the proposed change affects only some people who are not yet participnats, and (therefore) cannot be construed as a "cutback"? If so, that may not be the relevant test. Relevant is what impact applies to those who are already participants. Could the change reduce the proportion of the PS allocation received by current participants? and does it matter if they have not yet earned any right to the 2008 PS?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Perhaps I misunderstand the question. Is masteff's response implying that the proposed change affects only some people who are not yet participnats, and (therefore) cannot be construed as a "cutback"? If so, that may not be the relevant test. Relevant is what impact applies to those who are already participants. Could the change reduce the proportion of the PS allocation received by current participants? and does it matter if they have not yet earned any right to the 2008 PS?

My comments were solely to the question about changing the comp date. That can't impact people already in the plan because the amendment changes comp date to date of entry. By definition of already being in the plan, those participants' entry dates must predate Jan 1st, so they would still get full year comp.

As for persons in their first-year, my thinking was the plan has 2 entry dates per year, persumably Jan 1 and July 1. Full year comp would automatically apply to people who join on Jan 1. So it's only the people who enter on July 1 that the comp change would impact.

To me the only unanswered question is... if a person has otherwise qualified for the plan but is prior to the next entry date, do they have a right that's subject to anti-cut back, or does that right only accrue to them on their actual date of entry? As to the code and regs surrounding entry dates, my interpretation is that the person is not a participant until that actual entry date and therefore doesn't have any accrued rights until that date. I just haven't work on plans w/ entry dates so I was noncommittal above.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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Thanks masteff, you understand my question perfectly. My concern is that on July 1st, when somebody enters the plan, that on that day he/she has earned the right to receive a contribution based on full-year compensation. But it sounds like you're thinking that if the amendment is executed prior to July 1st, then the change has been made before that person accrued the right to receive contribution on full-year comp.

I like that response - I'm going with it. Thanks for your help!

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