EGTRRA and 411(d)(6) for Profit sharing plans

[AndyH]

If it is determined that a profit sharing plan does not incorporate the 401(a)(17) comp limit by reference, and the plan has no last day requirement, and it is amended mid-year to incorporate EGTRRA's $200,000 comp limit, is this a cutback for other employees?

If so, is the IRS contemplating any relief under 411(d)(6)?

This question is discussed in more detail on Corbel's website here:

http://www.corbel.com/news/pensionupdatesd...tail.asp?ID=157

Opinions?

[Belgarath]

Yes, I think it is a cutback. We aren't allowing it, in the situation you describe, on plans we administer. As to whether the IRS is contemplating any relief, I haven't heard anything. I'm inclined to think they will not give any relief on this.

[AndyH]

Thanks for the response, Belgarath.

That makes sense, except what doesn't make sense to me is the IRS wants the plans amended for GUST first.

And, we don't have approval on some of the volume submitter plan documents, so we can't amend many plans for GUST (properly).

Many plans won't be amended till late 2002 or even 2003.

Yet, EGTRRA is in effect, so if you follow the IRS' guidance you've created a cutback?

[Belgarath]

Yes, isn't this fun? Reminds me of one of the vinyards, might have been Caymus but I can't remember, that came out with "Conundrum." I think it helps to drink some while wrestling with these issues.

I'd say that you need to make sure to amend before someone accrues a benefit. As to what you do if someone waits too long, I haven't dared to consider it from a real life administrative standpoint. Our documents have a last day provision anyway, so I've been able to avoid coming up with a cohesive argument.

I suppose, if I got stuck having to amend after the participant had already accrued the right to an allocation, that I'd try to argue the following: that since it's a profit sharing plan, although the right to an allocation, IF A CONTRIBUTION IS MADE, accrued already, there's no actual ALLOCATION until the last day of the plan year. Therefore, it's ok to amend as long as you do it before the end of the plan year. I don't find this argument persuasive, but it's all I can think of if I had to play devil's advocate.

[AndyH]

I'd like some more feedback on this question. Here's the language in some documents in question. If this is a ps plan with no last day or 1000 requirement, is it a cutback to amend during this year for EGTRRA's $200K limit, or does this language incorporate 401(a)(17) by reference?

"1.6 "COMPENSATION" shall mean the compensation paid to a Participant by the Employer for the Plan Year which is reportable on Form W-2, but exclusive of any program of deferred compensation or additional benefits payable other than in cash. Compensation shall include any amounts deferred under a salary reduction agreement in accordance with Section 4.1 or under a Code Section 125 plan maintained by the Employer.

For purposes of determining who is a Highly Compensated Employee, Compensation shall mean compensation as defined in Code Section 414(q)(4).

In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provisions of the Plan to the contrary, the annual compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost-of-living in accordance with Section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12.

Any reference in this Plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision.

If compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, the OBRA '93 annual compensation limit is $150,000. "

[Belgarath]

Happy Monday! Well, I'd say this incorporates by reference. As far as amending this year (calendar year 2002 plan?) I'd think that the document must have at least a 500 hour requirement? If so, then I think you are safe in amending before they satisfy the 500 hours, because then they haven't accrued any right to an allocation.

Beyond that, I'm still thinking that this could be a cutback. Would be a cutback in most plans we handle. You could have a plain vanilla plan where the employer simply contributes (x)% of compensation, and you could avoid the cutback issue there, but it seems to me that the bulk of them, which have formulas skewed in favor of the HC, are still stuck with the cutback issue.

It does seem to me that I saw somewhere that the IRS had said the top-heavy issue wouldn't result in a cutback, but I haven't seen anything else that would help.

[MWeddell]

Prior to EGTRRA, plans limited compensation to $170,000. Now, they limit compensaiton to $200,000. This doesn't sound like a retroactive cutback to me.

It might violate the requirement that a plan have a predetermined allocation to change it once an employee has satisfied all of the conditions necessary to receive an allocation. However, by analogy to how the IRS treated the removal of family aggregation language in 1997 after the Small Business Jobs Protection Act of 1996 made this language unnecessary, the IRS might give employers relief for retroactive changes.

[Belgarath]

Mweddell - you're probably right, and I'm probably just paranoid. I certainly hope you are right, because your position makes a lot more sense. I just can't help feeling like if I abandon the (possibly overly) conservative interpretation that it will come back to haunt me. So until I see something from the IRS to the contrary, I think I will continue to hide behind my revetment. And I'll be delighted if I'm proven wrong!

[AndyH]

Wasn't there specifically some transitional relief for the family aggregation change?

Of course it would make perfect sense to issue transitional relief here, but it hasn't happened yet, and I don't get the sense that anybody is focusing on this issue. The only place I've seen it mentioned anywhere is Corbel's website, and if you read that Q&A you certainly can't come away with the impression that future relief will be forthcoming.