Egtrra

[Guest kgsingletary]

Please clarify the use of Rev Proc 2001-57...

My understanding is that ALL 401(k) plans, regardless of document type, must sign the "Good Faith" amendments prior to their effective date (1/1/02).

Please give ideas of how your TPA is handling this issue.

Thank you in advance!

:confused:

[MWeddell]

No, EGTRRA good faith amendments must be signed by the last day of the plan year for which they are effective.

[MGB]

Both of you are right and wrong.

It depends on which provisions you are talking about. In general, most provisions are expansions of options (e.g., catch-up contributions) or increases in limits (e.g., annual additions). For these, you need the good-faith amendments by the end of the year they are first effective. This is generally the end of the 2002 plan year, although some are sooner if you have a noncalendar year plan.

For provisions that are reductions in future amounts, the amendment must be in place before the participants accrue benefits under the new rules. For example, the top-heavy changes fall into this category. If a person were to accrue a minimum benefit under old rules and not under new rules, then the only way for them to not get the minimum benefit is to amend the plan before they accrue that benefit.

[KJohnson]

I HAVE SEEN MATERIAL REGARDING TOP HEAVY PROVISIONS AND THE POTENTIAL 411(d)(6) PROBLEMS OF WATING UNTIL THE END OF THE 2002 PLAN YEAR. I ADMIT I HAVE NOT REVIEWED HOW THEY CAME TO THE CONCLUSION THAT THE TOP-HEAVY AMENDMENT MUST BE IN PLACE BEFORE OTHER EGTRAA GOOD FAITH AMENDMENTS.

HOWEVER, BASED ON YOUR REASONING, I ALWAYS THOUGHT THAT YOU HAD TO BE AN EMPLOYEE ON THE LAST DAY OF THE PLAN YEAR IN ORDER TO BE ELIGIBLE FOR A TOP-HEAVY CONTRIBUTION. SO WOULDN'T AN AMENDMENT PRIOR TO THIS "ACCRUAL" DATE BE EFFECTIVE.

[Guest Giovanni]

I am also confused on this issue. Why would there be a anit-cutback issue under 411(d)(6) if there is a last day of year requirement to receive a top heavy contribution. I would think you have until 12/31/02 (last day of plan year) to adopt the good faith EGTRRA amendments. Does anyone know if my reasoning is wrong?

[Richard Anderson]

There is no last day requirement to accrue a top-heavy benefit in a defined benefit plan.

[KJohnson]

I guess that is what the prior poster must have been talking about (although this is the 401(k) Board). However, even then don't you have a 1000 Hour requirement for the top heavy db accrual so you still have some "breathing room"

For a D.C. Plan do you agree that you can adopt top-heavy along with other EGTRRA amendments anytime prior to 12/31/02 for a calendar year plan?

[rcline46]

What if you want to allow deferrals up to 100% or 11k? Doc may have lower rate stated.

[MGB]

Any provision that is being increased (or new like catch up) can be done by the end of the first plan year that it is effective. You can operationally comply during that one year.

[Guest Giovanni]

I was not talking about DB plans. My point was that I also don't see why a DC plan needs to adopt the good faith EGTRRA amendment for top heavy prior to 12/31/02. But, I also heard this is an issue (as KJohnson pointed out) and I'm not sure why. Does anyone know why this would be an issue?

[Guest Boilerburm]

MGB -

I agree with what you are saying, but others in my office don't. Do you have any cite or backup to saying that you have until the end of the year to adopt the benefit increase provisions? Specifically, the argument I am hearing is that if someone is going to use the expanded $200K comp limit, you need to adopt that prior to the beginning of the year, or at least before a benefit is accrued. If you have a standardized plan, that would be either on day 1 or, at latest, upon working 500 hours. Please help me support your and my understanding!

[KJohnson]

2001-42 is pretty specific. It says that

(2) if a ˜good faith˜ EGTRRA plan amendment is required to be in effect with respect to the provision, the plan provision was added or changed by a ˜good faith˜ EGTRRA plan amendment adopted no later than the later of (i) the end of the plan year in which the EGTRRA change in the qualification requirements is required to be, or is optionally, put into effect under the plan or (ii) the end of the GUST remedial amendment period for the plan.

Thus you have until the end of the 2002 year to amend when you previously put an EGTRRA change "into effect". The only exception given is for anything that would constitute a cut-back under 411(d)(6). What you describe does not appear to be a cut-back

I went back and checked 2001-42 and it is pretty specific that you don't need your top-heavy change for a DC plan until the end of the 2002 year. The only time this could be before your EGTRAA good faith deadline is if, for some reason, your GUST remedial amendment period extends beyond the end of your 2002 Plan Year (for example if the prototype or volume submitter sponsor gets its letter after 12/31/01). Then you have to have your EGTRAA good faith top heavy amendment in place before the deadline for your other good faith amendments-- but you would still have until the end of your 2002 year to amend for top-heavy.

[Guest Boilerburm]

Thanks, KJ. I agree that both the comp limit and the top-heavy changes appear to require a 12/31/02 adoption for calendar year plans. I guess my next question is - what possible EGTRRA changes would require a 12/31/01 adoption?? I don't see much in EGTRRA that I would consider a 411(d)(6) decrease or elimination of benefits! Any feedback would be much appreciated.

[stephen]

There is an article in the September - October 2001 issue of The Pension Actuary that discusses this topic (p 18).

What if the plan amends to include matching contributions for Top-Heavy calculations? Then there would potentailly be a benefit lost for non-key employees. What about due to the changes of definition of Key employee or changing from a five year look back to a one year lookback a plan dropping out of Top Heavy status.

The author goes on to say that these are problems for a db plan not a dc plan.

Another thought regarding amendments if you are looking to eliminate or reduce a Money Purchase contribution for next year that amendment and the 204(h) notice (no later than 12/15/01) will need to be completed by 12/31/01.

[KJohnson]

Stephen,

I agree that those are all potential cutback issues, but if a non-key does not accrue a top heavy benefit until the last day of a plan year in a d.c. plan or until he or she accrues 1000 hours in a db plan, it would seem that you still have "breathing room" to adopt your good faith amendments and they don't have to be in place prior to the beginning of the 2002 Plan Year.

[Bob R]

The problem is that there is no definitive answer -- and it's unlikely the IRS will issue anything further on this.

First of all, while I agree you can operationally apply the liberalizing (for lack of a better word) provisions of EGTRRA, I disagree with the comment that you can operationally increase a plan limit on how much someone can defer. If a plan limits deferrals to say 6%, nothing in EGTRRA changed that. There was no 6% limit under prior law -- that was just a plan design. So I find it to be a stretch to state that because the 415 limit has been increased to 100% that people can start deferring in 2002 up to almost 100% with a retroactive plan amendment made at the end of 2002.

Now the tougher issue -- 411(d)(6) cutbacks. Presume you have a standardized plan so that anyone who terminates with more than 500 hours shares in allocations of p/s or forfeiture allocations.

Does a retroactive plan amendment made at the end of 2002 cause a cutback? The IRS made it clear that for a d/c plan, you don't have to worry about the top-heavy rules because you don't accrue the top-heavy minimum until the last day of the year.

But, how about the increase in the comp limit to $200,000 or the change in vesting for matching contributions? By increasing compensation, you are reducing the share that is allocated to those who earn less than $200,000. Many people have heard the IRS state that in a similar circumstance (i.e., once someone has 500 hours in a standardized plan) you can't change an allocation formula, such as a non-integrated plan to an integrated plan --- even where it's a discretionary p/s contribution and no one is entitled to anything unless a contribution is made. This is what some people at the IRS have said informally so there isn't anything concrete on this. But, those who follow the IRS position would have the same problem by increasing compensation.

Take a look at vesting. If a schedule for matching contributions is reduced from a 7 year graded schedule to a 6 year graded schedule, you've reduce the amount of forfeitures to be allocated. So, those with over 500 hours have now had a reduction in the amount of forfeitures that would have been allocated because of a retroactive amendment to the vesting schedule. While this looks like a reduction, at least here you can argue that the change to the vesting schedule is required under the law (the compensation is not required). But, even though it's required to be changed, an employer has some flexibility in electing a new EGTRRA schedule. So it's possible there could still be a cutback issue for vesting as well.

Again, there is nothing definitive from the IRS on this. But, some people are being cautious and trying to have EGTRRA amendments done sooner than the end of 2002. All we do know is that if you do it sooner, you can't go wrong.

[Guest CTYSON]

It may be an issue if you'd like to use matching contributions to provide the top heavy minimum as allowed in EGTRRA. This could be considered a "cut back" since pre-EGTRRA, participants would receive match + 3% non-elective?

[KJohnson]

CTYSON,

I agree that could be considered a cut-back (even thugh pre-EGTRRA you could still use the match to satisfy top-heavy as long as it wasn't included in ACP). But I don't see this as an "early amendment issue. They are getting their match without regard to what you do for top-heavy. The only time they could "accrue" the match plus the 3% is as the end of the year. So if you amend before the last day of the Plan Year have you cut back anything that they have "accrued"?

[John A]

I'm convinced on the top-heavy issue. But what about Bob R.'s points related to the compensation and vesting changes, as they relate to allocation of contributions and forfeitures?

[KJohnson]

I had thought about the compensation issue and the change in the allocation formula after someone has "accrued" a right to an allocation under a discretionary profit sharing plan. As far as anything formal from the IRS on this issue, I think Technical Advice Memorandum 9735001 is pretty much on point that you cannot change your allocation formula after the accrual of a beneift for the year--even under a plan with a discretionary contribution. I always wondered, however couldn't you have two separate 401(a) formulas for the year? For example, for this issue have a discretionary formula using the $170,000 comp limit that the employer decides not to fund and a discretionary formula using $200,000 comp that it decides to fund? You have not taken away an allocation formula for the year, you have simply chosen, as you are entitled to do, not to fund that formula for the year. I suppose there could be "permanent cessation" and vesting issues involve with this, but it strikes me that this does not apply to any particular allocation formula but to discontinuance of contributions to the 401(a) portion of the plan as a whole.

Of course, if your plan references 401(a)(17) limits instead of a $ amount then you could have the cut-back problems for anyone earrning over $170,000 who has, for example, over 500 hours for the year in a standardized plan, if you wanted to subsequently limit comp to $170,000.

The vesting/forfieture point made is a good one. This must have come up in other contexts where there is a voluntary change to a more favorable vesting schedule. Anyone looked at this issue in that context?

[Bob R]

Arguing multiple discretionary contributions might work. But, you never know for sure. And, I suspect that when people update for EGTRRA at the end of 2002 that they won't include language pemitting an additional discretionary contribution.

As far as vesting, you have to go back to TRA '86. Many people operationally applied the more restrictive TRA '86 schedules. I don't recall the specific cite, but around the time that updates were being made in '93 to '94 the IRS issued something stating that there was no authority to apply the new vesting schedule without a plan amendment. But, because there was so much non-compliance, they weren't going to enforce the rule. The issue now is whether that puts eveyone on notice or whether there will be non-enforcement policy.