Dropping HCs from a PSP

[Guest Ddalk]

Does the anti-cutback rule bar HCs from quitting a discretionary profit sharing plan if they've been in the plan for years & have met the plan's eligibility requirements for receiving an allocation for the plan year?

Or does the anti-cutback rule apply only to NHCs? I'd really appreciate some advice on how to proceed with this matter. Thanks.

[Mike Preston]

The anti-cutback rules apply equally to HCE's and NHCE's.

The issue is whether they apply in your case.

Some take the position that you may amend a discretionary contribution plan up until the date that an allocation date is defined in a plan without violating the anti-cutback rules, even if somebody has met the requirements for an allocation before that allocation date (such as for a plan that requires only 500 hours of service to be eligible for a contribution for the year, but does not provide an allocation date until the last day of the year).

Some folks cite TAM 97-35001 as the reason why a plan can't be amended before the end of the plan year, even in a discretionary contribution plan, but there are those at the IRS who vehemently hold to the position that 97-35001 only stands for the proposition that in a discretionary contribution plan an amendment AFTER the end of the plan year is a problem. And some are even more lenient than that: in that only an amendment after both the end of the plan year AND after a contribution has been made for the year.

[Guest Ddalk]

Thank you for articulating the pitfalls involved with this problem Mr. Preston. I hate these 'gray areas' but that is part of the business. Thanks again.