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austin3515

-11(g) and New Comp

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We all know the story... The 25 year old in a new comp (non-safe harbor) termiantes and therefore gets no profiut sharing. The whole plan desgin hinged on this one employee benefitting.

May I please do a -11(g) amendment? See the Q&A below, though note that we did NOT do a projection. In the eyes of an ERISA attorney that I worked with on this issue a few years ago, he said "a projection is JUST a projection", i.e., the fact thtat one did or did not run a projection should not be a relevant factor. But I'm wondering if there is anything else out there.

From an ASPPA Q&A in Sept 2004:

57. An employer with a cross tested profit sharing plan receives a

contribution projection/allocation estimate approximately two months

prior to its year end and approves the recommendation. After that date

but before the year end, a NHCE participant quits. The plan has a last

day employment provision. When the new contribution calculation is

completed after year end, significant adjustments in allocations are

required to pass non-discrimination tests now that the terminated

employee is excluded. Can a -11(g) amendment be adopted to provide

the terminated employee (who is already 100% vested) with the same

contribution that he would have gotten had he not terminated, thus

passing the non-discrimination tests?

A: YES, so long as the -11(g) amendment is non-discriminatory and

meets the meaningful benefit rule. Reg 1.401(a)(4)-11(g)(2)

specifically includes the language: ... "a corrective amendment... may

grant accruals or allocations to individuals who did not benefit under

the plan during the plan year being corrected." Since this participant

is a vested NHCE, a -11(g) amendment that adds him back and gives

him an allocation that allows the non-discrimination test to pass (the

amount does not have to be what he would have received if he had not

terminated) would be acceptable under the regs.

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ignore the fact the plan is a new comp.

lets suppose its a 2 person plan, the NHCE quits after working 500 hours and doesn't receive a contribution. so you fail coverage. how would you fix? you have to give him a contribution (or else say, sorry owner, you can't get a contribution this year?)

so you put in a corrective contribution to the NHCE to fix the problem. Just in case the person is 0% vested, make sure there is some vesting attached to the contribution as well, the IRS has never specified how much. Certainly a 100% vested contribution should satisfy the IRS. hmmm. how come 'the IRS' spells 'theirs'?

your situation is no different.

I posed the question to the IRS slightly differently last year

A company sponsors a discretionary profit sharing plan that has tiered

allocations and utilizes cross testing to show nondiscrimination in amounts.

Owners are allocated a contribution equal to their 415 limit. All other

participants are allocated a contribution equal to 5% of compensation, which

satisfies the gateway minimum. The Plan fails nondiscrimination testing.

The plan could have passed by providing a 6% contribution to all eligible

participants, instead of a 5% contribution. Is the plan sponsor obligated to

correct the failed testing by contributing more to the current participants, or

is it permissible to put in a corrective amendment and permit entry and

provide a 5% contribution to an individual who was previously ineligible

(assuming that would permit the plan to pass nondiscrimination testing)?

Either proposed correction is possible, but both probably require an amendment to the plan that

satisfies Treas. Reg. § 1.401(a)(4)-11(g), in both form and timeliness. In form, such an

amendment generally either confers additional benefits to existing participants or existing

benefits to additional participants. In either case, the amendment must be both “definitely

determinable” and nondiscriminatory.

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That was YOUR question? I actrually highlighjted that one and sent it around the office. For some reason I remember the cited question before I remember that one from just a few months ago...

But I should say, I read your question originally to be much more geared towards bringing in an ineligible particpant, for example, someone who had not yet met the age requirement (how sly of me to want to brinhg in a 20 year old based on this!). While I definitely think it applies to my original question, could it perhaps be used to change a plan's initial eligiblity?

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yeh, blame me, if they get somewhat long winded they might be mine if its a discrimination type question. by ineligble I had meant 'ineligible for the contribution' e.g. due to hours or whatever, but I guess it came off a little different, though I guess the answer would be the same.

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Tom, can I inquire further with a little different twist? Suppose you are using a pre-approved volume submitter plan, that has specific allocation language that says, in effect, that if you fail testing, you will allocate via an integrated formula. Can you then use that -11(g) amendment to override that language? I guess I'm gun-shy on this, as it seems so unlike the IRS to allow this kind of flexibility in a situation where an integrated allocation provides MORE to the NHC than the general test, and that it is still ok to override the plan default language to then give back more of a given allocation to the HC?

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I'd agree, I think you are stuck at that point. But I don't think its any different than having failsafe language. you are stuck in the fact you can never get to the avg ben pct, even though you migt have passed doing so.

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