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11(g) Amendment


RLR
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Client has a calendar year SH NE 401(k) plan. PS allocation conditions are 1,000 hours and last day.  The client wants to amend the plan retroactively to 1/1/17 to remove the last day requirement since operationally that is what happened.  Can we use an 11(g) amendment to accomplish this?  If not, is there any other way to accomplish this?

 

 

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Mike,

One of the owners terminated before 12/31/17, but worked 1,000 hours and mistakenly received a PS contribution.  That is why the client wants to remove the LD requirement and bring in all terminated employees with 1,000 hours.  Is your answer the same?  Everyone is in their own class and there would not be a cutback in benefits.  The amendment is not needed to pass 410(b) or 401(a)(4).  That's why I'm having a hard time understanding this.  It seems like it would be a discretionary amendment that would have to be adopted before the end of the year. Does an 11(g) amendment really have this much flexibility?   

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If the only person who gets to keep his/her allocation based on the 11(g) amendment is a 5% owner, then as Mike is suggesting, I think, the amendment would fail the nondiscrimination requirement of 1.401(a)(4)-11(g)(3)(v).

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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I think Mike is (cryptically) suggested you read the reg thoroughly to review the requirements.  This one might be of note (boiled down - the amendment itself may not be discriminatory):

(v)Corrective amendment for coverage or amounts testing -

(A)Retroactive benefits must be provided to nondiscriminatory group. Except as provided in paragraph (g)(3)(v)(B) of this section, if the corrective amendment is adopted after the close of the plan year, the additional allocations or accruals for the preceding year resulting from the corrective amendment must separately satisfy section 401(a)(4) for the preceding plan year and must benefit a group of employees that separately satisfies section 410(b) (determined by applying the same rules as are applied in determining whether a component plan separately satisfies section 410(b) under § 1.401(a)(4)-9(c)(4)). Thus, for example, in applying the rules of this paragraph (g)(3)(v), an employer may not aggregate the additional accruals or allocations for the preceding plan year resulting from the corrective amendment with the other accruals or allocations already provided under the terms of the plan as in effect during the preceding plan year without regard to the corrective amendment.

Ed Snyder

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On 6/4/2018 at 5:23 PM, Luke Bailey said:

If the only person who gets to keep his/her allocation based on the 11(g) amendment is a 5% owner, then as Mike is suggesting, I think, the amendment would fail the nondiscrimination requirement of 1.401(a)(4)-11(g)(3)(v).

I think you are misreading it.  The 11g amendment doesn't ALLOW him to keep his/her allocation, is allows EVERYONE an allocation in a non-disciriminatory method.  The allocation to the HCE was NOT "his allocation"; it was a mistake and had to be taken away if they did not otherwise make it work.  If we do an amendment that allows all eligible employees with 1000 hours  to have a standard PS allocation regardless of their year end status, that is a perfectly permissible provision and I can't even think of a way it could fail non-discrimination in the example you give us.

RLR said: "It seems like it would be a discretionary amendment that would have to be adopted before the end of the year. Does an 11(g) amendment really have this much flexibility? "

The answer is an emphatic YES!  IT is a discretionary amendment but as long as it meets all the requirements of an 11g, it is ok to adopt it right up until 10/15 (for a calendar year plan) and have retroactive effect. 

WOT A COUNTRY!

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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What are you concerned about; where do you see a problem?  Aren't we passing 410(b) with this group?  What am I missing?

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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If the effect of the amendment, standing on its own, divorced from the provisions of the plan before the amendment, results in a single HCE getting something and no similar NHCE's then it wouldn't satisfy 410(b).

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1 minute ago, Mike Preston said:

If the effect of the amendment, standing on its own, divorced from the provisions of the plan before the amendment, results in a single HCE getting something and no similar NHCE's then it wouldn't satisfy 410(b).

Of course, but in this example he said way back at the beginning the following:
One of the owners terminated before 12/31/17, but worked 1,000 hours and mistakenly received a PS contribution.  That is why the client wants to remove the LD requirement and bring in all terminated employees with 1,000 hours.

That's why I said: If we do an amendment that allows all eligible employees with 1000 hours  to have a standard PS allocation regardless of their year end status, that is a perfectly permissible provision and I can't even think of a way it could fail non-discrimination in the example you give us.

Of course, he didn't give us the actual numbers, but it sure sounds like we have a 410(b) group, no?

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I know we are both preaching from the same pulpit. Maybe I've just recently been burned by actual numbers when any reasonable interpretation of the description would be harmless.  Bottom line for me is: pretend I'm from Missouri.

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Using the paragraph Bird cited but highlighting differently in bold face

v)Corrective amendment for coverage or amounts testing -

(A)Retroactive benefits must be provided to nondiscriminatory group. Except as provided in paragraph (g)(3)(v)(B) of this section, if the corrective amendment is adopted after the close of the plan year, the additional allocations or accruals for the preceding year resulting from the corrective amendment must separately satisfy section 401(a)(4) for the preceding plan year and must benefit a group of employees that separately satisfies section 410(b) (determined by applying the same rules as are applied in determining whether a component plan separately satisfies section 410(b) under § 1.401(a)(4)-9(c)(4)). Thus, for example, in applying the rules of this paragraph (g)(3)(v), an employer may not aggregate the additional accruals or allocations for the preceding plan year resulting from the corrective amendment with the other accruals or allocations already provided under the terms of the plan as in effect during the preceding plan year without regard to the corrective amendment.

 

since all terminees were provided that would seem to satisfy 410(b), but does it separately satisfy 401(a)(4) as well? e.g. there was nothing to indicate if this was comp to comp or cross tested.

 

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This is complicated. RLR tells us that we are not dealing with just 1 HCE, but rather there are "a few NHCEs" as well.

So first, if the plan passes 401(a)(4) and 410(b) without the amendment, by simply applying the last day requirement, is the amendment "corrective" at all? Arguably not, but 1.401(a)(4)-11(g), as far as I can tell, does not define "corrective," so let's let that one go for sake of argument. (If the amendment only benefits folks and otherwise meets the requirements of 11(g), I would feel pretty comfortable with it even if arguably it is not "correcting" anything that needs to be corrective.) The second question is, which set of "requirements" do we test the "corrective" amendment under? The 1.401(a)(4)-11(g)(3)(v)(A) requirements for "coverage or amounts testing?"  The 1.401(a)(4)-11(g)(3)(v)(B) requirements for satisfying a safe harbor? Or the the 1.401(a)(4)-11(g)(3)(vi) requirements for BRF? We have to choose one of those sets of requirements, right? I would assume it would be the "coverage or amounts testing" set of requirements. If so, then the additional allocations resulting from the amendment need to satisfy 401(a)(4) and 410(b) as if they were the only allocations.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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9 hours ago, Mike Preston said:

I know we are both preaching from the same pulpit. Maybe I've just recently been burned by actual numbers when any reasonable interpretation of the description would be harmless.  Bottom line for me is: pretend I'm from Missouri.

No problem; and well understood.  We should probably ask the original poster how many OTHER NHCEs will be brought in with the one HCE. 

So, RLR: can you provide that info?

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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9 minutes ago, Luke Bailey said:

This is complicated. RLR tells us that we are not dealing with just 1 HCE, but rather there are "a few NHCEs" as well.

So first, if the plan passes 401(a)(4) and 410(b) without the amendment, by simply applying the last day requirement, is the amendment "corrective" at all? Arguably not, but 1.401(a)(4)-11(g), as far as I can tell, does not define "corrective," so let's let that one go for sake of argument. (If the amendment only benefits folks and otherwise meets the requirements of 11(g), I would feel pretty comfortable with it even if arguably it is not "correcting" anything that needs to be corrective.) The second question is, which set of "requirements" do we test the "corrective" amendment under? The 1.401(a)(4)-11(g)(3)(v)(A) requirements for "coverage or amounts testing?"  The 1.401(a)(4)-11(g)(3)(v)(B) requirements for satisfying a safe harbor? Or the the 1.401(a)(4)-11(g)(3)(vi) requirements for BRF? We have to choose one of those sets of requirements, right? I would assume it would be the "coverage or amounts testing" set of requirements. If so, then the additional allocations resulting from the amendment need to satisfy 401(a)(4) and 410(b) as if they were the only allocations.

Luke, trust us! It is well established that you don't have to prove that there is anything to correct in order to do an 11g amendment and the service has said this many times. The reason is that given the complexity of the rules, it is quite possible that on a given test for non-discrimination, it is quite possible that using different methodologies or allowed assumptions, you might pass.  The IRS recognizes that it is not possible or practical or cost effective to require every possible permutation to be run, thus, there is no requirement that you "prove" failure in order to do an 11g amendment. And as you found out yourself, a reading of the rules themselves do not require a proof of failure to meet the requirements of a valid 11g amendment.

We agree that the amendment must stand on its own to pass 401(a)(4) and 410(b) as if it were a component plan (a stand alone plan).

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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12 minutes ago, Larry Starr said:

No problem; and well understood.  We should probably ask the original poster how many OTHER NHCEs will be brought in with the one HCE. 

So, RLR: can you provide that info?

Mike and Tom P: Hmmmmm....

New example: If the -11g amendment to eliminate end of year employment brings in only one HCE because he is the only one (in a given year) that was excluded by that provision, does the amendment pass non-discrim (let's assume the base plan is a design based safe harbor PS plan with no bells and whistles, just to make the case clear)?

4 hours ago, RLR said:

This is a CT plan with each person in their own group.  My understanding is that the new accrual that is provided by the amendment has to be tested by itself for 401(a)(4).  

The amendment itself has to be non-discriminatory on its own, and the plan must still pass non-discrimin with the additional dollars added to the HCe.  

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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39 minutes ago, Luke Bailey said:

If so, then the additional allocations resulting from the amendment need to satisfy 401(a)(4) and 410(b) as if they were the only allocations.

Yup.

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21 minutes ago, Larry Starr said:

New example: If the -11g amendment to eliminate end of year employment brings in only one HCE because he is the only one (in a given year) that was excluded by that provision, does the amendment pass non-discrim (let's assume the base plan is a design based safe harbor PS plan with no bells and whistles, just to make the case clear)?

It does not.

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The other "gotcha" has to do with deduction timing for contributions made compliant via-11g amendments.

As i understand the original facts, the contribution originally made to the HCE was not permitted by the plan terms.  Allocations created after the plan year end via -11g amendment would NOT be deductible for the plan year they are allocated to.  Rather that contribution would be deductible in the year the amendment was executed (the following year).

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An 11-g amendment is effective as of the first day of the plan year to which it pertains.  So why wouldn't a contribution allocated thereunder not be deductible for that plan year?  I think there is a reason why the latest date for the amendment is 9 1/2 months after PYE: tax form extensions.

QKA, QPA, CPC, ERPA

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

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