May A Plan Require A Participant To Be Employed On A Day Other Than Th

[Guest Edward McElroy]

A Law firm maintains a profit sharing plan that covers all its employees. The plan currently requires participants to be employed on last day of the plan year to receive an allocation. During the year, certain partners have left the firm. The firm wants these partners to receive an allocation. May the firm amend its plan to provide that allocations will be made to individuals who were employed on ... say September 1, provided this change would not discriminate in favor of highly compensated employees.

[Guest ERead]

Sounds to me like it would be discriminatory if the only people affected were the prior "Partners". I think you would need to look and see if others will be involved or not. I don't think there are any limits on the change, other than the fact that you would probably be moving to a Volume Sub or Individually Designed plan to accomodate that language. You might be better off requiring 1000 hours for contribution allocations.

[MWeddell]

In general, one can require employment as of a certain date other than the last day of the plan year. One plan design I've seen a couple of times is employment at the end of a quarter to receive that quarter's profit sharing contribution. The plan won't qualify for a 401(a)(4) safe harbor, so general testing will be needed. Also, it generally can't be done with a prototype plan document.

In your circumstance, making the change sounds like it would be discriminatory. There's a facts and circumstances test that applies to the timing of adopting an amendment in Treas. Reg. 1.401(a)(4)-5(a). ERead's suggestion to require 1000 Hours of Service instead of employment as of September 1 is a practical suggestion because it makes the amendment look less suspicious so the IRS might not detect the issue on audit as easily, but the legal issue remains unchanged because the timing of the adoption of the amendment still has the effect of favoring HCEs.

Also, unless you made the amendment within a day or so after your original posting, it's too late to change your 1998 allocation formula for a calendar year plan. The IRS regulation for 411(d)(6) protected benefits define "other rights and features" in a way that clearly implies that changing an allocation formula after someone has satisfied its conditions (the end of the plan year for a plan that requires employment on the last day of a plan year) is indeed a protected 411(d)(6) benefit that can't be retroactively changed.

[stephen]

Assuming the Law Firm currently requires Last Day and 1,000 hours to receive a profit sharing contribution, could they not drop the Last Day provision (this would be increasing benefits not cutting them back)?

[Guest ERead]

I believe the original intenet was to include certain individuals who left during the year. By droping the end of year requirement alltogether (which is an option - you are correct) the plan would then have to consider all terminated employees in the allocation, they may not be eligible by other requirements, but they would still need to be looked at.

I'm not sure that was the original intenet, but it is allowed.

[Wessex]

If the plan year has ended, it may not be possible to avoid a 411(d)(6) problem even if the last day requirement is eliminated altogether and the timing of the amendment would not favor HCEs. If the allocation formula is a specified percentage of compensation, it would probably be ok because the amount of the contribution for anyone who met the last day requirement would not be reduced; rather the $ amount of the total employer contribution would increase. Under any other allocation formula it would be likely that some people would get less. Even if it is a discretionary contribution that is allocated on the basis of compensation, unless there is a history of a specific percentage or method of determining the amount of a contribution, it is at least possible to argue that the $ amount of the contribution would have been the same $ amount if the amendment had not been adopted, and thus the people who met the last day requirement would get less.

[This message has been edited by Wessex (edited 01-28-99).]