1.401(a)(4)-11(g) retroactive amendment

[Belgarath]

Have a PS plan, that excludes bonuses, commissions, and overtime. Three separate "check" boxes in the adoption agreement. They fail the testing this year by excluding bonuses, but would pass if you include bonuses. The plan is silent on the correction method if you fail.

Two schools of thought here. One is that you could do a retroactive amendment under 1.401(a)(4)-11(g) to include bonuses, you pass, end of problem.

Another is that absent specific plan language, you would automatically have to "revert" to total compensation. And that therefore any retroactive amendment that would limit compensation at all, as with first method(because overtime and commissions would still be excluded) is a cutback and you can't do it.

I'm leaning toward the first interpretation, which seems more reasonable, but I'd appreciate any thoughts on this. Thanks.!

[Mike Preston]

I'm not having any luck understanding what you are attempting to do. Couple of points. 1) You can't cut back anybody's benefit with an -11g amendment. If you are talking about "reddoing" the allocation such that some people's compensation goes up, while others stay the same, such that those that stay the same get less of the original dollars to be allocated, that is a cut back and can't be done. 2) Testing is independent of plan provisions, with the exception that an -11g amendment's effect must stand on its own as a non-discriminatory allocation.

[AndyH]

I think that you definitely have a cutback if you are not careful.

Have you considered general testing the allocations, either on a benefits or contributions basis? I'd be that you could find a way to make it pass. This assumes that the plan had no language to the contrary.

[Belgarath]

Hi Mike - the employer would actually be increasing the contribution - so if he contributes 10% of pay, for example, it would give a higher allocation to any NHC who received a bonus. Wouldn't take anything away from anyone else. So the purpose is to pass, without including overtime and commissions - just the bonus.

As far as standing alone, I believe, perhaps mistakenly, that it doesn't apply under (g)(3)(v)(B) if the correction is to conform to a safe harbor? What's your take on this? Thanks again.

[Mike Preston]

If you are saying that the -11g amendment is "10% of bonuses", and the effect of that amendment is that the non-discrimination tests are satisfied both after givng affect to the amendment and, in isolation, just considering the "10% of bonuses" amounts, then your -11g amendment is fine. There is no "automatic bounce" to "all compensation" in the case of a failed general test which is then perceived to be a cutback when something less than all compensation is used under the final, post -11g amendment, plan terms.

[Belgarath]

Hi again - no, the proposed amendment wouldn't be for "10% of bonuses," although it has that net effect in this situation. (This isn't even a plan we administer, just doing a favor for an accountant, but it's a good question to get straight in my head anyway.) The amendment would be to remove the existing exclusion of bonuses in the plan definition of compensation, which would, in effect, increase the contribution for all participants IF the employer contributes the additional amount. But I can certainly see where this could backfire, if the employer kept the contribution amount the same, then it would be a cutback. I think this would be a lot cleaner in a Money Purchase plan.

If you take the approach that it is ok as long as the additional amount is contributed, then I should think they'd want a very specific corporate resolution, increasing the contribution by the appropriate percentage for each affected participant. Any other thoughts on this?

[Mike Preston]

I would feel more comfortable with an amendment that spells out what you are attempting to accomplish. If the "net effect" of what you want to do is to provide for an allocation of "10% of bonuses", then I would suggest they adopt an amendment which says exactly that.

[jaemmons]

belgareth,

I would look at 401a4 testing before doing any retroactive amendment. In the least, you could bring the argument to the accountant, for whom you are doing this work, that this is the only alternative for the client to comply with 401a4 testing with respect to the allocation of the employer contribution. The client may not wish to contribute more $'s and may ask the accountant to "find a way for this to work".

Just a suggestion

[Belgarath]

Ok, and thanks much for the input.

[Mike Preston]

jaemmons is of course right. Howeer, I thought that Belgarath had indicated that 401(a)(4) testing had already been done and that the result of that testing was that the plan failed.

[AndyH]

I thought I had already suggested this. I don't see where there is an indication that anything other than 414(s) had failed. I find it very hard to believe that a comp exclusion can't be made to pass using some version of the general test, at least in most circumstances.

As I once heard Ed Burrows say, the general test never fails; the client may instead run out of money, but the test never fails. There are too many options to exhaust.

[Mike Preston]

Guess it depends on your defintion of "the test". If "the test" was merely a 414(s) analysis, AndyH's original suggestion was on point.