Amendment timing

[dmb]

I have a standardized calendar year profit sharing plan. I am interested in amending my plan to a Cross Tested formula. If I adopt the amendment May 1, 2002, can I pro-rate the standardized portion of the contribution based on comp earned through April 30 and allocate the cross tested formula on comp from 5/1?? Thanks.

[Guest stryan]

You can make the rules for allocating the employer contribution in your profit sharing plan as difficult and arcane as you choose. However, your compliance testing will still need to be made on the plan's limitation year rather than the plan year segments you have suggested.

[Mike Preston]

A strict reading of 8735001 would probably say no. It appears that the only way to accomplish what you want is to put in a second plan. I'm assuming here that the standardized plan has the standard standardized language that states a participant accrues a right to share in the allocation after working 500 hours and that you have at least one participant in the plan that has those 500 hours as of 5/1/2002 and that, further, that participant would receive less if the formula change is adopted than they would have received had the employer not adopted the change and, finally, made the same contribution to the plan.

I think it may be possible to add a second type of employer contribution to the plan, leaving the first type as subject to the rules of the standardized plan and invoking new eligibility and allocation formula provisions for the second type. This is a rather drastic amendment to a standardized plan, though. Maybe it can be accomplished through some volume plans rather easily.

As I see it he client has the following choices:

1) forget it for 2002

2) adopt a second plan for 2002. If the client chooses this route it might be advisable to look to local counsel as to whether or not a contribution to both plans needs be made (watch out for forfeitures).

3) amend the plan to provide for what you want and submit to the IRS asap, thereby hopefully getting some resolution before the end of the year.

Maybe a combination of 2 and 3 makes sense, planning on not funding the separate plan if the IRS allows the amendment in 3.