Jump to content

Plan Amendment to Exclude Highly Compensated Employees


Recommended Posts

Plan A excludes a large class of employees that are required to be included in testing for minimum coverage.  Coverage testing had never been an issue in the past due to there being no HCEs (non-profit entity, so no owners).  Now there is a HCE under compensation rules, and we have a coverage test failure.  Plan Sponsor of Plan A wishes to amend Plan A going forward so that HCE's are excluded from participating in order to pass minimum coverage under Treas. Reg. Section 1.410(b)-2(b)(6).  Does this proposed amendment violate Anti-Cutback provisions?  Any other concerns?

Link to comment
Share on other sites

Correct, not an issue to exclude HCEs prospectively. But if this person was in the plan for one year and created a failure, how did you deal with that? Or did you pass on average benefits but the plan sponsor would prefer not to incur the expense of having to run that test each year?

Link to comment
Share on other sites

48 minutes ago, CuseFan said:

Correct, not an issue to exclude HCEs prospectively. But if this person was in the plan for one year and created a failure, how did you deal with that? Or did you pass on average benefits but the plan sponsor would prefer not to incur the expense of having to run that test each year?

We are correcting the minimum coverage failure by adopting a separate retroactive amendment and making a QNEC in order to bring the plan into compliance for the plan years in which a failure occurred.

Link to comment
Share on other sites

I am super busy today so I am just give a warning that may or may not apply being done from memory.  A year ago an ESOP I work with excluded all HCEs and a very large number of their employees.  This included employees who had been participants who had even gotten allocations in the past. 

 

No one had any problem with this amendment.   It was pointed out that when people were checking into all of this that this amendment was a partial plan termination and all of the people had to be 100% vested.   The term the ERISA Outlines Book used was a "horizontal partial plan termination".  There might be too few people here to matter.   But if you read the regs on PPT it says a plan amendment can cause one.  I quote:

 

Treas. Reg. 1.411(d)-2(b)(1)
(b) Partial termination -
(1) General rule. Whether or not a partial termination of a qualified plan occurs (and the time of such event) shall be determined by the Commissioner with regard to all the facts and circumstances in a particular case. Such facts and circumstances include: the exclusion, by reason of a plan amendment or severance by the employer, of a group of employees who have previously been covered by the plan; and plan amendments which adversely affect the rights of employees to vest in benefits under the plan.

Once again it might mean nothing here as it is one person.   But if I knew this before last year I had forgotten and this turned into an interesting conversation about the cost of the amendment and if the client still wanted to do it.   They did but it did change the dynamic of the thought process.  

Link to comment
Share on other sites

18 minutes ago, ESOP Guy said:

I am super busy today so I am just give a warning that may or may not apply being done from memory.  A year ago an ESOP I work with excluded all HCEs and a very large number of their employees.  This included employees who had been participants who had even gotten allocations in the past. 

 

No one had any problem with this amendment.   It was pointed out that when people were checking into all of this that this amendment was a partial plan termination and all of the people had to be 100% vested.   The term the ERISA Outlines Book used was a "horizontal partial plan termination".  There might be too few people here to matter.   But if you read the regs on PPT it says a plan amendment can cause one.  I quote:

 

Treas. Reg. 1.411(d)-2(b)(1)
(b) Partial termination -
(1) General rule. Whether or not a partial termination of a qualified plan occurs (and the time of such event) shall be determined by the Commissioner with regard to all the facts and circumstances in a particular case. Such facts and circumstances include: the exclusion, by reason of a plan amendment or severance by the employer, of a group of employees who have previously been covered by the plan; and plan amendments which adversely affect the rights of employees to vest in benefits under the plan.

Once again it might mean nothing here as it is one person.   But if I knew this before last year I had forgotten and this turned into an interesting conversation about the cost of the amendment and if the client still wanted to do it.   They did but it did change the dynamic of the thought process.  

Thank you very much for point out that issue.  Although I had not considered that issue, I do not think that becomes an issue here as the Employer only has one HCE, however, that is very good to know.

Link to comment
Share on other sites

What kind of retroactive amendment are you doing?

 

If the plan has fail safe language for coverage, you need to follow the rules in the plan document for corrections.

QKA, QPA, CPC, ERPA

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

Link to comment
Share on other sites

I agree with all of the foregoing. I just wanted to add that the anti-cutback rule would apply only if a plan amendment retroactively eliminated or reduced a participant's accrued benefit or an optional form of distribution, unless, in the case of an optional form of distribution, such amendment is specifically authorized by IRS regulations located at Sections 1.411(d)-3(b) - (f) and 1.411(d)-4, Q&A-2.  For purposes of determining whether a plan has been amended to reduce or eliminate an optional form of distribution, plan mergers, consolidations, spinoffs and transfers to a different plan are generally treated as amendments. Prospective freezing, reduction or elimination of accruals and optional forms of distribution are generally permitted, subject to the risk that the affected participants may be deemed to have been impacted by a partial plan termination and propecitvely reducing or eliminating accruals may require a 204(h) notice to be furnished to impacted participants.

  • Like 1
Link to comment
Share on other sites

15 hours ago, David Olive said:

There is none, to my surprise.

That's sometimes good.  I rarely put fail safe language in my docs.

QKA, QPA, CPC, ERPA

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

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...