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Retroactive amendment to change eligibility


jpdrews
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Client has a 401k plan with age 21 and 12 mos service requirement for the purpose of employee deferrals, matching, and profit share.  The client hired two employees earlier this year, both of whom are HCE's (owners' spouses).  Client is wondering if it's possible to retroactively amend the eligibility to 6 mos to allow spouses to defer in 2022?  Or, is it possible to create a new class of employee with separate eligibility criteria for these two allowing them in the plan immediately and leave the age 21/12mos criteria in place for all others.  Plan otherwise passes ADP testing (no employer contributions are being made to the plan) and coverage testing.  

 

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Beyond thinking about when someone might have met a service condition to become eligible for allocations of one or more of the three kinds of contributions, remember too that “[a] cash or deferred election can only be made with respect to an amount that is not currently available to the employee on the date of the election.” 26 C.F.R. § 1.401(k)-1(a)(3)(iii)(A) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(a)(3)(iii)(A).v

If an employee is only now considering a § 401(k) election, one imagines the election might apply only to 2022’s 4th, 12th, 24th, or 26th pay period.

The business organization might carefully check its records to discern whether it hired two employees or admitted two partners.

“For purposes of [the same section’s] paragraph [about when cash or another taxable benefit is currently available to the employee or deemed employee], a partner’s compensation is deemed currently available on the last day of the partnership taxable year[.]” 26 C.F.R. § 1.401(k)-1(a)(6)(iii) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(a)(6)(iii).

Thus, a partner might, in 2022’s remaining two business weeks, elect a § 401(k) deferral regarding the whole of the partner’s 2022 compensation (if the partnership’s tax-accounting year ends with December’s end).

I see nothing on the face of § 1.401(k)-1 that restricts which kinds of partnership interests get the last-day provision quoted above. A partner need not be a capital-interests partner; one could be a profits partner, or even a guaranteed-payments partner.

The retirement plan’s measure of compensation and when it became available must be logically consistent with all the partnership’s tax returns and tax-information returns.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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