11(g) Amendments

[Laura Harrington]

One of our client's has a PS plan and a DB plan. My firm does not administer the DB plan.

The PS plan is a discretionary New Comparability plan with the employees divided into 4 groups based on job function.

The two plans are aggregated for coverage. The DB actuary completed the general nondiscrimination testing. He did the testing assuming a 7% nonelective contribution to the NHCEs plus an additional amount for just two individuals, which he stated had to be given in order for the general test to pass.

These two individuals are not in a group by themselves for the profit sharing. The PS plan document says that the profit sharing contribution will be divided equally by compensation within each group in the plan document. So by completing the PS allocation as requested by the actuary, we will violate the PS plan document.

My question is whether or not we can do an 11(g) amendment when there are other ways to resolve the failed general test without doing a retroactive amendment (i.e. raise everyone in that group to the higher percentage)?

11(g) provides an option to retroactively amend a plan to correct a nondiscrimination failure. But can you consider the nondiscrimination test to be failing in a discretionary PS plan before you have exhausted all of the options?

Thank you,

Laura

[Jim Chad]

I cannot imagine a way to write the amendment that could not be interpreted as a cut back for some of the people in that group. On the other hand, if you take people out of that group, the contribution for the remaining people in that group, would be allocated to fewer people, so you might argue that it is an increase. But I would not want to argue with an IRS auditor on this.

FWIW I think you are stuck giving everyone in that group the higher percentage the DB Actuary said.....unless he is increasing it to pass the average benefits percentage test. In which case the needed increase may be a smaller percentage if it is going to more than 2 NHCE's.

[K2retire]

Are there any HCEs in the group with the 2 people the actuary wants to increase?

[Laura Harrington]

No, only NHCEs.

[rcline46]

Jim, if the stated allocation to a group is 5% of pay, and the -11(g) amendment says 'Notwithstanding the foregoing, for 12/31/2008 Sally will receive an additional $145 and Peter an additional $120", how do you see that as a cut back for the group?

[K2retire]

Because that group is now receiving 5% plus $265 and it is no longer allocated prorata within the group.

[BG5150]

Because that group is now receiving 5% plus $265 and it is no longer allocated prorata within the group.

It wouldn't be anty different than if someone was in a group that was to receive zero, but the 11(g) amendment gives Sally Skedaddle a $150 contribution to pass the test; the $150 is not prorated across the group.

[movedon]

I think the issue is - can a plan that can pass testing without an amendment choose to fail and then correct with an amendment. I vote no.

[rcline46]

THe 11(g) does NOT say Group X is increased by some amount, it says PERSON x is increased. There is nothing improper with this amendment nor does it grant rights to a GROUP directly or indirectly. In fact, 11(g) specifically acknowledges this which is why it exists. Also note that this does not affect any accrued benefits because it happens AFTER the year end! It is a retroactive amendment which is why the IRS believes and such contribution is only deductible in the year the amendment is signed.

(Side note, I don't think you can do this to a prototype plan because it makes it an individually designed plan.)

[Bird]

As rcline46 notes, there's nothing wrong with an -11g amendment. And the plan sponsor is under no obligation to make the plan pass testing under the "original" contribution amounts, otherwise, at least in a plan with groups, there would never be a need for such an amendment. The drawbacks are document limitations, and current year deductibility vs prior year.

[Laura Harrington]

As rcline46 notes, there's nothing wrong with an -11g amendment. And the plan sponsor is under no obligation to make the plan pass testing under the "original" contribution amounts, otherwise, at least in a plan with groups, there would never be a need for such an amendment. The drawbacks are document limitations, and current year deductibility vs prior year.

This is a prototype document, so there is the concern of making it an individually drafted document. Could the -11(g) amendment retroactively change the plan so that everyone is in their own group? That would fit within the confines of their prototype document and allow us to do what the actuary has asked.

In my opinion, the idea that the plan can retroactively amend their document to change the allocation formula even though the current document provides a way for the general nondiscrimination test to pass seems contrary to the requirement that there be a definite allocation formula.

A few people mentioned the deductibility issue with -11(g) amendments. Does anyone have a cite for this?

Thanks!

Laura

[Blinky the 3-eyed Fish]

Retroactively putting everyone in their own group is not an option. The -11(g) amendment to give higher dollars to the two people absoutely IS an option. I agree the additional amounts for the two people are deductible in the following year. You won't find anything formal on this. The logic is that the plan is amended after year end and not under the 2.5 month rule for pensions, so it cannot affect the deduction for that year that ended.

[Kevin C]

Please bear with me. I'm still trying to get a handle on this.

Our GUST and EGTRRA VS new comparability documents require that the allocation satisfy the 401(a)(4) general test. The GUST version has a correction method, reduce the HCE allocation and spread it to the other groups. The EGTRRA version doesn't list a specific correction method.

1.401(a)(4)-11(g)(3)(ii) Benefits not reduced. --Except as permitted under paragraph (g)(3)(vi)©(2) of this section, the corrective amendment may not result in a reduction of an employee's benefits (including any benefit, right, or feature), determined based on the terms of the plan in effect immediately before the amendment.

(g)(3)(vi)©(2) refers to amendments adopted by the last day of the plan year, which this amendment would not be.

If you don't calculate the amount each person would have received under the terms of the plan before the amendment, how do you know whether or not you have reduced anyone's benefits?

[BG5150]

That quote is saying to me that you can't adjust someone downwards to pass the test based on the allcoation formula in affect at the time you do the amendment.

Basically, you calculate the allocation. Run the test. And do additional contributions as needed to pass the test (as opposed to reducing the allcoation of HCEs), and you validate those contributions with the -11g amendment. This way, there is no possiblity of reducing any employee's benefits.

[AndyH]

FWIW, I second the comments of both the Bird and the Fish, not that either should be a surprise. Now if we had the Benefit of Mr. Kite's view and perhaps Donkey Kong could chime in..............

And IMHO Laura's instincts are right.

[Guest Donkey Kong]

You call me from jungle. This better be important. I agree with other animals. Donkey Kong out. You no call again.

[Peanut Butter Man]

On the EGTRRA prototype, does your document permit putting each individual in their own class? I'm asking because I had this issue pop up today, and the prototype we use says there can be no more than 25 classes.

[Laura Harrington]

On the EGTRRA prototype, does your document permit putting each individual in their own class? I'm asking because I had this issue pop up today, and the prototype we use says there can be no more than 25 classes.

Yes, our prototype does allow us to put everyone in their own group, but then there is a caveat about how many groups you can have since it is a prototype document.

I mis-spoke when I said this particiular client was using a prototype document. It is actually a volume submitter document. Our prototype and volume submitter documents look (and read) almost exactly the same.

[AndyH]

You call me from jungle. This better be important. I agree with other animals. Donkey Kong out. You no call again.

Educate thyself c/o Wikipedia

Donkey Kong was created by game designer Shigeru Miyamoto, along with two other characters............. The three characters were supposed to mirror the love triangle that exists in the Popeye comics. Donkey Kong was cast as the antagonist, with the creator explaining that a gorilla is not "too evil or repulsive". Shigeru believed "donkey" meant "stupid" in English, and assumed the name Donkey Kong would convey the sense "stupid ape" to an American audience

[Guest Donkey Kong]

Me may be stupid but not too stupid to know you call me stupid. Watch out. I fling my poo!!!

[Kevin C]

So you are saying that, as long as the NHCE's get at least the allocation I want them to get, ignoring that the desired allocation under the current terms of the plan fails 401(a)(4) even though the plan says the allocation must pass 401(a)(4), then when the -11(g) amendment increases contributions for a small number of select individuals, everything is OK?

I'm also having trouble grasping the conclusion that the -11(g) amendment being discussed only increases allocations for the 2 NHCE's. The desired level of contributions for the NHCE's does not support the desired allocation to the HCE prior to the amendment. If no amendment is done and no additional amounts are deposited, the HCE contribution must be reduced for the plan to pass 401(a)(4). The contribution becomes part of the accrued benefit when it is allocated under the terms of the plan. So, how is the portion of the desired HCE contribution that he could not get unless the plan is amended treated as anything other than an increase in the HCE's accrued benefit due to the plan amendment?

Looking at it from the other direction, If the HCE's desired allocation IS part of his pre-amendment accrued benefit, then what about the NHCE desired allocations? The NHCE's would have to get larger allocations under the pre -11(g) terms of the plan for the plan to pass 401(a)(4). So, when they get less than they would have if the plan was not amended, how is that not reducing their accrued benefits?

[Mike Preston]

Interesting take on it. But I think you are overthinking it. As long as the plan doesn't require that the allocation being made satisfy a given requirement (such as passing 410(b) or 401(a)(4)) then the fact that an allocation to the HCE's is not supported, 401(a)(4)-wise, by the allocation to the NHCE's does not create an additional right for the NHCE's, nor does it allow reducing the HCE's.

The HCE's benefits are accrued. No question about it. The only question is whether the plan sponsor wants a qualified plan. Yes? I thought so. In which case they need to do something. How about an -11g amendment? Grand idea.

But, if the plan says that the allocation has to satisfy a rule of some sort, then the allocation has to satisfy that rule. Does the plan say that?

[Kevin C]

In the New Comparability section for the PS allocation, it says:

The Plan must satisfy the general nondiscrimination rate group test under Treas. Reg. §1.401(a)(4)-2©

with respect to the separate allocation rates under the Plan. The Plan will use standard interest rate and

mortality table assumptions in accordance with Treas. Reg. §1.401(a)(4)-12 when testing the allocation

formula for nondiscrimination.

[Mike Preston]

Bummer.

[Kevin C]

That quote was from our EGTRRA VS document. But, I'm not the one currently in need of an -11(g) amendment.

Laura, what does your document say?

[Laura Harrington]

Exactly the same wording as quoted above.

[K2retire]

Further supporting my earlier contention that you have to raise the whole group -- not just the people you want to raise.

[Blinky the 3-eyed Fish]

K2, but your supposition was based on facts not in evidence. The fact is you could have retroactively provided the higher benefit for 2 people if it weren't for this document language that appears to be constraining that option. It just means the document sucks. (That last sentence was just preempting a post from QDROphile.)

(edit misspelling)

[K2retire]

Perhaps -- it is the only way I've ever seen a cross tested allocation group written.

[Belgarath]

Some docs also provide that if you don't pass general testing, you revert to some form of design based safe harbor allocation specified in the document. You wouldn't be able to do the 11(g) amendment proposed in this post in these plans either.

Blinky - are the documents you've seen/used that you refer to (that don't suck) prototype/volume submitter documents, or custom?

[BG5150]

Have you asked the document provider/author what it thinks about the issue?

Many times when I am not sure if something can be accomplished in a plan, I go back to the provider/author. Perhaps teh same question was posed to them and they already have an answer.

[Kevin C]

The language I quoted in post #23 was added during the review process. I have a copy of the document as it was originally submitted to the IRS in January 2006. That language is not in the original version.

For those of you with individually designed documents that don't require the allocation to satisfy 401(a)(4), have you received an EGTRRA determination letter?

[J Simmons]

LRM #94 did not require of EGTRRA prototypes the kind of language that is quoted in post #23

[Blinky the 3-eyed Fish]

Blinky - are the documents you've seen/used that you refer to (that don't suck) prototype/volume submitter documents, or custom?

We now use Relius VS docs. I don't see that language in there.

[Kevin C]

Blinky,

Does the Relius document have bottom-up QNEC language? I heard the IRS was making document providers remove it, but the ASC document was approved with modified bottom-up provisions.

[Blinky the 3-eyed Fish]

The EGTRRA doc has language that follows the new regs. I wouldn't expect anything different.

[Kevin C]

Is that a yes or a no?

The ASC modified bottom-up QNEC language complies with the final regs.