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Amendment to wrap plan to change plan year - retroactive?


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Wrap plan with 12/1 - 11/30 plan year.  Employer wants to change to a calendar year.  Can the effective date of the amendment be 12/1/21 (resulting in a short plan year of 12/1/21-12/31/21 and new plan year of 1/1/22 - 12/31/22) or do we have to use a 12/1/22 effective date?  I have seen references in articles that an amendment to change the plan year cannot be effective until the first day of the next plan year, but they do not provide any citations.  I guess technically if we use a 12/1/21 effective date the amendment will be retroactive since it will be adopted after the end of the new short plan year...  Any help/citations either way would be appreciated!

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If the wrap plan includes a Section 125 cafeteria plan (which most do), the cafeteria plan regs are very restrictive about changing plan years.

Aside from the cafeteria plan regs, I can't think immediately of any cites. I think the IRS and DOL would take the position that you are already in your plan year beginning 12/1/2021 and need to terminate the plan year before starting a new.

Are you also going to change the py's of the plans that are wrapped, e.g. health, life, etc.? Have you checked with the insurers on their willingness to do that?

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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Agree with Luke that you would have to be very careful about the Section 125 cafeteria plan.  Those have to be adopted/amended prospectively.  If the amendment or restatement includes an effective date prior to the date of its adoption, it will not comply with Section 125.  That would jeopardize the Section 125 safe harbor from constructive receipt--potentially resulting in all employee elections becoming taxable.  There's even a couple bad case law precedents highlighting that very issues.

Full details: 

You also from a practical standpoint couldn't change a health FSA component of the cafeteria plan to a short plan year mid-year because that would require a prorated salary reduction contribution limit.  Employees have already made irrevocable elections that will exceed any prorated limit.

However, I disagree with Luke that it would be common to have the cafeteria plan combined with the ERISA wrap plan document.  I've never done that and think it would create many problems.  So assuming your ERISA wrap doc has not made a Frankenstein combo with your Section 125 cafeteria plan, I generally don't see any problem with changing the ERISA plan year under the wrap doc to a short plan year mid-year. 

Just don't forget if the plan is subject to Form 5500 filings you'll need a short plan year fling.  So you'll need a filing by the end of June for the regular plan year, and a filing by the end of July for the short one-month transitional plan year.

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3 hours ago, Brian Gilmore said:

However, I disagree with Luke that it would be common to have the cafeteria plan combined with the ERISA wrap plan document.  I've never done that and think it would create many problems.  So assuming your ERISA wrap doc has not made a Frankenstein combo with your Section 125 cafeteria plan

Brian, what would the Frankenstein problems be? You have, say, an employer with > 100 participants and several different insurance policies, a cafeteria plan, an FSA, and a DCAP. The cafeteria plan lists all of those, because they require employee contributions. Everything is on a calendar year. You have language that says that the cafeteria plan document is the wrap document, i.e. all the benefits are under the cafeteria plan document that is a "wrap" document, and they form one plan for 5500 purposes, but you note that some benefits may not be subject to ERISA, i.e. the Section 125 mechanism itself is just a tax thing, not really a benefit, and the DCAP is not an ERISA plan. What's the problem?

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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Luke, I suppose you could make it work, but you will have introduced ERISA concepts into multiple non-ERISA benefits (e.g., POP, DCAP), and introduced Section 125 restrictions to the wrap doc that otherwise don't apply under ERISA (e.g., prospective amendment only).  You'd have to balance all those areas of law with every aspect of the document.

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Thank you for your replies. The wrap plan does not include a 125 cafeteria plan;  only medical, dental, vision, life, STD, LTD, FSA, DCAP and EAP.  Each of these benefits have already transitioned to a calendar year and they are just catching up the wrap to this.  I have read that there is really no guidance on point as to changing the plan year of a wrap mid-year and the conservative approach is to make such change prospective.  Based on your replies, it looks like they could have a short plan year from 12/1/21 - 12/31/21 and start the new plan year 1/1/22.  

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