Retroactive Amendment

[R. Butler]

We have a calendar year profit sharing plan. Effective date 1/01/01. Eligiblity requirements are 21 & 1. Plan sponsor wants to now retroactively amend the Plan to include all employees employed on 01/01/01. Is there any reason this can't be done?

Several people have told me that such an amendment must be made within 2 1/2 months after the end of the Plan Year, based on 412©(8). I don't see how 412©(8) is relevant because profit sharing plans are not subject to the minimum funding rules.

[mbozek]

It seems that all you are doing is adding participants who are entitled to a contribution for 2001 which is not a problem as long as the plan is amended. Issue is whether a tax deduction can be claimed for 2001- if tax return for 2001 has not been filed, allocation should be deductible but check with your accountant to see if allocation had to accrue as of end of 2001 for it to be deductible. 412© is not applicable to ps plans.

[jpod]

Could it be a problem in terms of compliance with the "definite allocation rule?" By amending the plan after 12/31/01 to add new participants, you are taking away a portion of the allocation (if any) which each original participant would have had in the absence of the amendment. And, it wouldn't matter that the contribution had not been made before the amendment was adopted.

[AndyH]

I think jpod has a valid point. Adding people could take away contributions for participants as of 12/31/20001.

And, mbozek, are you saying that a calendar plan can be amended in May 2002 retroactive to 1/1/2001 for a discretionary change? What is the justification? I'm not saying it can't be done, I just have never heard of such a thing and wonder what the justification/authority might be.

[R. Butler]

The employer will make the maximum allowable contribution. If we are able to amend and count the added employee's comp. in the 15% calculation, everyone's contribution will actually increase by approximately 6.3%.

If I had inadvertently included the employee it seems to me I could correct under 2001-17, Appendix B by retroactively amending the Plan. I'm not sure why a different rule would apply here. I am concerned about being able to count the employee's comp. in the 15% calculation. Assuming I can amend, is there anything that prevents me from using the comp. in that calculation.

[mbozek]

Why not? retroactive amendments are only prohibited if they will violate the qualification provisions of the IRC. Adding participants for the purpose of making a contribution for them is not prohibited conduct as long as it does not result in discrimination. Under the existing law there is no requirement that allocations in a PS plan accrue as of the end of the plan year. See reg. 1.401(a)(4)-2©(2)(ii) " allocations include all employer contributions that are allocated or treated as allocated to the account of an employee under the plan for the plan year." In a plan which provides discretionary contributions it is not unusual for a board resolution to be adopted after the end of the taxable year which provides for the allocation of the contributions among the participants. The contribution is deducible if made by the date for filing the tax return. If there has been no board action on the amount of the allocation to the plan then the additional participants could be added to the plan for the purpose of an allocation. If allocation has already been made for 2001, employer could pass another bd resoluion appoving contributions for new participants.

[Mike Preston]

Nah. It can't be done. The IRS takes the position, as jpod noted, that it is a violation of 411d6. I disagree with the assertion that the employer is making the maximum contribution. It was always able to contribute more, it was just that some would be non-deductible and subject to an excise tax. But it wouldn't violate the qualification rules to make such a contribution. Hence, the adoption of an amendment after the end of the year that would change the allocation of those funds by diverting some of them to newly designated participants vilolates 411d6.

Now, I should point out that I consider the IRS position in this to be unfortunate, if not downright wrong, from a moral perspective. In a discretionary contribution plan there really should be no prohibition on this. But that is not her position.

[R. Butler]

Mike Preston,

I am not necessarily disagreeing with you, but I need help following the position. How is 411(d)(6) relevant? The contribution is discretionary. The employer can decide just not to contribute to anybody. If the allocation formula is not being amended I don't the relevance.

Also, do you know how the IRS squares their position that this can't be done with 2001-17? If I had allocated the contribution to an ineligible inadvertently, the IRS actually instructs you do a retroactive amendment. How is the correction method in 2001-17 different from the end result in my scenario?

Thanks for your input.

[mbozek]

According to R.butler everyones' contribution will increase by 6.3% as a result of adding participants. If everyone's contribution increases how is there a d 6 violation ?

[Mike Preston]

I'm not saying I agree with it, but TAM 9735001 is pretty clear, isn't it?

"Whether section 411(d)(6) is violated by a retroactive amendment of an allocation formula under a discretionary profit- sharing plan adopted after the end of the plan year, but before the due date for the employer's return for the corresponding taxable year, resulting in lower allocations for some participants than the allocations they would have received under the allocation formula in the plan during the plan year. "

Now, I have been railing against this for almost 5 years. But one should at least be aware of its existence and the IRS position.

Now, I admit that the facts of the TAM are not "good" and that in the absence of such a case, the IRS may never have seen fit to clarify the issue.

But this is clearly the IRS position on this at the moment. The precise second that anybody has a right to share in an allocation according to a specific formula (where for this purpose I include identification of the bodies that share as part of that formula) it is a violation of 411d6 to modify the formula so that somebody gets "less."

About the only way I can see the referenced plan escaping this web would be if the provisions of the plan had a maximum allocation of 15% and the addition of participants was done in such a way that the original folks still got their maximum.

But if it is just a regular profit sharing plan, the real limit is 25%, not 15%. The artificial deductible limit doesn't mean much in this situation.

[R. Butler]

Mike Preston,

Thank you for the cite. I will try to find that, but again how do they reconcile that position with their own correction method in 2001-17?

[AndyH]

Which part of 2001-17 are you referencing?

[R. Butler]

Rev. Proc. 2001-17, Appendix B, Section 2.07(3).

[Mike Preston]

I don't think you can generalize between a correction concept and a non-correction concept. In order to get into the correction concept mode, one must have done something wrong. I can imagine there are certain circumstances where the IRS might object to intentionally doing something wrong and then using a correction method that involves a retroactive amendment.

Now, if the plan were administered as if the people were eligible and then it was discovered later that it shouldn't have been so, then if one felt that following SCP or VCP was appropriate, it would be possible to correct.