Jump to content

Lame Duck
 Share

Recommended Posts

I have a client with a calendar year 401(k) plan. The plan currently has a non-integtrated, pro-rata allocation for employer contributions. Unbekownst to us, the client added a cash balance plan just prior to year end.
The cash balance plan uses a non safe harbor allocation method. The cleint has come to us to amend the 401(k) plan to provide for the non safe harbor alocation. We told them we could do it for 2014 but not 2013 saince they requested the change after the plan year end. The client's financial advisor has come bact to us and requested that we amend the plan retroactively under 1.401(a)(4)-11(g). I am not sure this is really a corrective amendment for the 401(k) plan but I did see one example in the regs that indicates that if the client has 2 plans, the correction can be made in either plan. The plan is not a safe harbor plan.

Thanks for any help.

Link to comment
Share on other sites

at the 2010 ASPPA Conference I asked the following

cross tested plan - all NHCEs are in one group

every year plan allocates owners to the 415 limit,

then 5% gateway minimum.

this year plan fails testing.

does the plan have to increase contribution to all the NHCEs or can it put in a corrective amendment to selective individuals

IRS response was either way was possible.

of course such Q and As don't necessarily reflect an actual Treasury position. on the other hand, the question was submitted months before the Conference, and the IRS does meet with the ASPPA folks beforehand to go over questions, so it is not off the cuff either.

Link to comment
Share on other sites

It's not clear if you are asking if they can do a corrective amendment to increase contributions to NHCEs that would allow the two plans to pass testing, or if you are asking if they can (effectively) re-write the allocation formula to do whatever they want (presumably giving HCEs more than a pro-rata allocation would have given them).

In the first scenario - yes, I think so.

In the second scenario - I'm not sure, but I'm not very comfortable with it. It's been pointed out by others that although the section is titled "corrective amendments," you don't actually have to have a failure in order to use it. There are some rules in there about benefiting a non-discriminatory group. You'd first have to allocate at some percentage - 1%, 3% or whatever - and then do the corrective amendment for the rest. I guess the idea would be to allocate some tiny percentage according to the plan terms and then to a corrective amendment that independently satisfies non-discrimination, and in combination with other contributions, satisfies non-discrimination. I'm not sure that there's anything specifically prohibiting it but it's (IMO) clearly not in the spirit of the law to be able to effectively change from a pro-rata allocation after the end of the year in order to increase contributions to HCEs.

There's also the issue of deductibility - I have it in the back of my mind that -11g amendments are deductible in the year made, not the prior year. I'm not sure I can cite that but I know for sure someone who knows way more about this than I do said it, maybe a long time ago.

Ed Snyder

Link to comment
Share on other sites

There's also the issue of deductibility - I have it in the back of my mind that -11g amendments are deductible in the year made, not the prior year. I'm not sure I can cite that but I know for sure someone who knows way more about this than I do said it, maybe a long time ago.

So, I'd have to tell my accountant that the $100,000 I reserved for PS is deductible for 2013, but we had to do an 11-g that added $2,400 and is deductible only for 2014? So when he sees the check for $102,400 he'll have to remember that not all of can be deducted?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

Link to comment
Share on other sites

Here is a TAM dealing with a similar situation.

http://benefitslink.com/src/irs/tam9735001.html

In the Q&A scenario Tom cites, the initial allocation under the existing plan terms maxes out the owners, but does not pass 401(a)(4). The corrective amendment discussed would leave that initial allocation in place and add additional accruals for NHCEs. That meets the requirement under 1.401(a)(4)-11(g)(3)(ii) that benefits not be reduced determined based on the terms of the plan in effect immediately before the amendment. It also meets the requirement under 1.401(a)(4)-11(g)(3)(iv)(A) that the additional contributions resulting from the amendment separately satisfy 401(a)(4).

When you start with a pro-rata allocation, I think those two requirements will probably prevent what they want to do. I say probably because you didn't give any details about what they want to do.

Link to comment
Share on other sites

There's also the issue of deductibility - I have it in the back of my mind that -11g amendments are deductible in the year made, not the prior year. I'm not sure I can cite that but I know for sure someone who knows way more about this than I do said it, maybe a long time ago.

So, I'd have to tell my accountant that the $100,000 I reserved for PS is deductible for 2013, but we had to do an 11-g that added $2,400 and is deductible only for 2014? So when he sees the check for $102,400 he'll have to remember that not all of can be deducted?

That's how I understand it. I can't give a cite but it's something that has stuck with me from way back.

Ed Snyder

Link to comment
Share on other sites

Thanks for the response. I'm not really sure what the client is trying to accomplish with the amendment since they haven't explained their reasoning behind it. The administrator for our firm who handles the plan doesn't think the client intends to make any contribution under the profit sharing plan but only wants to amend it so that the DB and PS plans have the same allocation formulas. We are trying to get more information from the client but haven't gotten it yet.

Link to comment
Share on other sites

I have a similar situation - the client has a 401(k) Safe Harbor (3%) cross-tested plan, paired with a Cash balance. This year the testing happens to blow up and large contributions are needed to the NHCE as profit sharing because of the benefit provided in the CB plan.

the actuary wants to do a corrective amendment under 11(g) to add in a recent hire who is younger and would improve the required contribution to pass testing quite a bit. I have reservations about this since the 401(k) plan is safe harbor.

Do others think the 11(g) amendment would be permitted in this circumstance?

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...