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Dougsbpc

11-g Amendments to Pass 401(a)(26)

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Took over a small DB plan that excluded two physicians by name and highly compensated nurse practitioners. For the past 5 years, they have only had 4 physicians who met the eligibility requirements. All were HCEs and Keys. The plan passed 401(a)(26) in past years as 2/4 = 50%, which is greater than 40%. They now also have 3 nurse practioners who met the eligibility requirements. All happen to be HCEs and are therefore excluded from the plan. Any problem with bringing in one nurse practioner through an 11g amendment to pass 401(a)(26) even if they would be an HCE and in an excluded class? Would it be possible to do this every year?

Thanks

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Under Treasury Regulation 1.401(a)(4)-11(g) you have 9.5 months after the plan year end (the year that failed) to amend the plan retoractively to make it pass. I think that includes 401(a)(26). However, doing so every year seems like a problem to me - could it be a violation of the definitely determinable benefit requirement? I do not think it would be the way to go forward each year.

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In this particular instance; if the nurse practioners were all hired on the same date and have the same title I think you would need to get very creative to define groups that don't name the nurses individually or discriminate based on age. That doesn't mean it's not possible. What are the compensations and ages? It might be easier to try and get one of the doctors into the plan instead. 3/7 = 42%.

To address J4FKBC, I think updating a DB plan "every year" to pass 401(a)(26) is fairly common (in this economy) but that is a very valid point. For instance, I don't think updating cash balance percentages for staff to pass 401(a)(26) on an annual basis (when needed) violates the definitely determinable benefit. Many plans have done that lately. We would love to keep it at one rate but unfortunately the economy and interest rates aren't playing nice! I think the same goes for this instance, the plan was designed with the business planning to stay with four doctors. Then plans changed and the only way to pass was to change plan eligibility.

I do want to make one note, by changing "every year" I am referring to a plan with a stable design and not a plan coming up with staff rates after the fact to make it the smallest amount possible...if that makes sense.

To bring it a little bit further, I have seen some attorney's who do temporary increases to staff to pass 401(a)(26). I.E. staff get a pay credit of 2.5% but get a pay credit of 3% for 2011 and then back to 2.5% after 2011. For the most part though, I have seen it being an ongoing increase to staff. I.E. staff get a pay credit of 2.5% for years before 2011 and 3% for after 2011. I would be interested to hear what others have seen or are doing.

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I think updating a DB plan "every year" to pass 401(a)(26) is fairly common

by changing "every year" I am referring to a plan with a stable design and not a plan coming up with staff rates after the fact to make it the smallest amount possible

My take is that if the design requires an amendment to the benefit formula every year, then I don't see that as a stable design. I would be concerned that the true benefit is not really defined and the employer is making it a discretionary formula subject to the annual plan amendment. I think that's a problem for a DB plan.

I have seen some attorney's who do temporary increases to staff to pass 401(a)(26).

For the most part though, I have seen it being an ongoing increase to staff.

We see these both ways. We see plans that need a relatively modest increase will make that as a permanent ongoing change. For us, the bigger plans with more employees have been more likely to make the amendment only apply to the exact people needed to pass and only for that year.

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I think updating a DB plan "every year" to pass 401(a)(26) is fairly common

by changing "every year" I am referring to a plan with a stable design and not a plan coming up with staff rates after the fact to make it the smallest amount possible

My take is that if the design requires an amendment to the benefit formula every year, then I don't see that as a stable design. I would be concerned that the true benefit is not really defined and the employer is making it a discretionary formula subject to the annual plan amendment. I think that's a problem for a DB plan.

We are on the same page with this item. I put every year in quotations to mean only because with 30 year treasury rates dropping over the last three years, some plans have amended staff three years in a row. A plan that requires an amendment every year would be a big red no-no in my opinion.

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In this case they do have two more nonhighly compensated employees who have not yet met the eligibility requirements. There is every expectation that they will eventually enter the plan.

I think that if the plan were designed to fail there would be a problem with definitely determinable benefits. However, the design that is in place is objective. It just happens that all of the eligible NPs for this year are HCEs.

Any disagreement?

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Can you use an 11(g) amendment to pass 401(a)(26)? You clearly can for 410(b), but I wasn't aware you could for 401(a)(26) - probably because it has never come up! But a quick look through 11(g) doesn't show me where it can be used for a 401(a)(26) violation. Guess I'll have to look into this a little more.

Hmmm - I still don't think you can. I think you'd have to go through VCP, where the IRS might very well approve it using the 11(g) methodology. But I don't think you get a free pass by attempting an 11(g) amendment. I'll be interested to see what others think.

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Can you use an 11(g) amendment to pass 401(a)(26)? You clearly can for 410(b), but I wasn't aware you could for 401(a)(26) - probably because it has never come up! But a quick look through 11(g) doesn't show me where it can be used for a 401(a)(26) violation. Guess I'll have to look into this a little more.

Hmmm - I still don't think you can. I think you'd have to go through VCP, where the IRS might very well approve it using the 11(g) methodology. But I don't think you get a free pass by attempting an 11(g) amendment. I'll be interested to see what others think.

I think using the term "11(g)" is throwing everything off.

A defined benefit plan can be amended after the fact to increase benefits at any time. Therefore, no special exceptions, such as a 11(g) for plan corrections is needed in order to allow it. I think that's the whole point of 1.401(a)(4)-11(g). 11(g) allows a special exception for a plan that is past the deadline to amend to increase benefits to do so to pass 401(a)(4). A defined benefit doesn't need a special exception like 11(g).

Can you add this amendment? Yes.

Is it allowed to be added because of 11(g)? No, it's allowed because Defined Benefit plan amend after the fact.

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Back many years ago (around the time of the Paul Schultz memorandum (2002) we administered a combo DB and DC plan). Combined, they passed 401(a)(4) and 410(b) but provided less than 1/2% of pay for one group in the DB plan. The IRS audited the plan and claimed the DB plan failed 401(a)26 because benefits were considered unreasonable. Their solution was an 11g amendment to provide 1/2% of pay per year of participation for any participants the plan sponsor wanted to choose as long as 40% accrued reasonable benefits. They were very clear that ONLY an 11g amendment would allow retroactive correction. I believe they also mentioned that an 11g amendment could be used to correct demographic failures of 401(a)4, 410(b) and 401(a)26 as long as they were executed within 9 1/2 months following the close of the plan year.

Unlike the case that was audited, this plan not only needs to provide a benefit of at least 1/2% of pay, it needs to select who that individual is, and that person is an HCE and is excluded from participation by the terms of the plan. Can you instead bring in NHCEs who have not met the plan's eligibility requirements?

The HCEs would have met eligibility requirements (1 year and age 21), they are just excluded by class. I would think that if one of them is brought in, you have no discrimination problems as all who have met eligibility requirements are HCEs.

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My only point being, call it whatever you want to call it. You can amend this plan to correct it.

I would caution you about how you brought in the individual though. You can be creative but you aren't supposed to name individuals to groups in a DB plan like in a DC plan.

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My only point being, call it whatever you want to call it. You can amend this plan to correct it.

I would caution you about how you brought in the individual though. You can be creative but you aren't supposed to name individuals to groups in a DB plan like in a DC plan.

"You aren't supposed to.." is contradicted by many real life examples. Plans do exclude by name, and they apply different benefit structures by groups or by individual names. Your position is a little naive.

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I very much stand by my comment. You go ahead and keep doing that and wait for an audit. The IRS has been very clear that you can say "employees hired in 2005" even if employee X is the only one and you are obviously creating a group for an individual but don't name the individual by name.

If you want to take that risk for your client, by all means go ahead. I am just saying you're not supposed to do that. I have seen real life examples, the majority of my work is small defined benefit plans that are not safe harbor.

I have seen ERISA attorney's who draft documents for our clients use individuals, and that's their perogative. I have seen others who very much don't. We don't. It's so easy to not do it, why play with fire?

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Gosh, I'm confused now. A normal state of affairs for me. Frizzy/Doug - I have a couple of questions:

"I think using the term "11(g)" is throwing everything off.

A defined benefit plan can be amended after the fact to increase benefits at any time. Therefore, no special exceptions, such as a 11(g) for plan corrections is needed in order to allow it. I think that's the whole point of 1.401(a)(4)-11(g). 11(g) allows a special exception for a plan that is past the deadline to amend to increase benefits to do so to pass 401(a)(4). A defined benefit doesn't need a special exception like 11(g).

Can you add this amendment? Yes.

Is it allowed to be added because of 11(g)? No, it's allowed because Defined Benefit plan amend after the fact."

Frizzy - can you provide any sort of a citation for this, and is there a timeframe? For example, if it happened 5 years ago, I have trouble imagining that the IRS would give you a free pass to retroactively amend to bring in an excluded participant, without running it through VCP. And if there is no formal guidance, then I can certainly believe the IRS informally (as Doug suggests) allows the retroactive amendment within the 11(g) timeframe. I also recall some discussion amongst the actuarial bunch (of which I'm distinctly not a member - math isn't my strong point) that there was debate due to the IRS being a pain about the deduction when you did retroactive DB amendments - could you deduct it as required funding for the prior year. I realize that's a separate subject, and I don't want to hijack the question at hand unless it has any bearing.

I'd just feel a lot more comfortable with all this if there is in fact some official guidance. If not, oh well. I'm also wondering if, since Revenue Procedure 2008-50 is so prevalent for corrections now, whether the IRS would follow the informal procedure Doug refers to from an unofficial statement that long ago, or if they would NOW say you have to go through VCP?

I appreciate any comments or insight you may have. Thanks!

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According to 1.401(a)(26)-7(b), retroactive correction is the methodology for correcting a failed 401(a)(26) test.

We always get corrections done before the contribution deadline. I found a cite from a source that said the IRS has informally stated that self-correcting language is okay and that the deadline is the 15th day of the 10th month but doesn't provide anything other than "informally".

I think the contribution deadline makes sense to me so I will continue to use that. That's when we need to have testing done by anyway inorder to use 11(g) for the Profit Sharing plan that we almost always have attached to our DB plans. (Did I just come full circle on 11(g)?)

My background has always just been in practice. And we get our tests done before 15th day of the 10th month which is probably why I didn't know that was the deadline but it only makes sense.

I hope that helps.

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"The IRS has been very clear that you can say "employees hired in 2005" even if employee X is the only one and you are obviously creating a group for an individual
but don't name the individual by name.
"

For some reason, I thought this "don't use names" question was gone when the IRS allowed individual rate groups in DC plans for testing. I've seen a lot of D letters for DB plans with names for accruals, including 5310 letters which including the 401(a)(4) test, again where the IRS had no problems with the plan using individual names.

How clear has the IRS been and/or how long ago were they clear on this? Do you have a citation or reference from a conference maybe? Just curious.

edited to add: avoiding names for coverage testing is understandable, since you won't be able to resort to the ABPT for coverage purposes if the 70% ratio is not met.

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If that's the situation it's new to me but I have zero doubt you're right. At least I'm not completely crazy (other than maybe to SoCal) if at one time it was not acceptable. I have several collegues who went to conferences where they had Q & A's with the IRS where they stated you could use the round about way to name groups but not name them individually. That could have been years ago though. I think we'll continue to use it as dumb as it might sound.

It really has never been a major issue using the round about way.

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In regard to the above (fixing year after year  etc) what if a hard frozen (not underfunded pbgc) plan is not covering 40% of current active employees anymore. To correct this two employees were added to the plan and given 1/2 percent for the year of participation. Question: What if the next year the plan again needs to add an employee or two to meet the 40%. 1. Can you now add another 2 employees and give them as well 1/2% for the yr of participation? 2. What about the 2 employees that were brought in the prior yr - do you need to give them an additional 1/2% for the current year of participation as well or you only need to give them 1/2% in the yr. that they are added to the plan and once they are in, they are just carried forward with that benefit (since plan is frozen)? Thank you.

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