Amending a Standarized Document

[Guest taj32z]

Question- The plan document is a Profit Sharing Standardized Adoption Agreement. The client would like to change to a Non-Standardized Adoption Agreement where participants would have to be employed on the last day of the plan year and work 1000 hours to receive an employer contribution. Can this be done?

Thanks for any input.

[Tom Poje]

yes, but...

if an employee has already worked 500 hours this year then he has already met the requirements for the standardized plan and for all practical purposes it would be too late to do anything this year.

[Guest taj32z]

If the plan were to be amended to a non-standardized adoption agreement, would you have to provide any notification to the participants a certain amount of time prior to the plan being amended (i.e. 15 days), and going forward, would the current participants still have the same rights as if the old standardized adoption agreement were in place in future plan years (would it be considered a protected benefit)?

[R. Butler]

If the plan were to be amended to a non-standardized adoption agreement, would you have to provide any notification to the participants a certain amount of time prior to the plan being amended (i.e. 15 days)

Advance notice not required. You will have to provide a Summary of Material Modifications no later than the 7 month following the close of the Plan Year.

going forward, would the current participants still have the same rights as if the old standardized adoption agreement were in place in future plan years (would it be considered a protected benefit)?

I assume from the intial post you are asking whether current participants will be subject to the last day/1,000 hour requirement. As Tom Poje pointed out employees meeting the 500 hour requirement before the amendment is adopted will not be subject to the amendment in the current year. All particiapnts would be subject to last day/1,000 hour requirement in subsequent years.

[Archimage]

Let me throw this out. Most standardized documents say that active participants must be employed on the last day of the plan year and the 500 hours requirement is for terminated participants. How does an active participant accrue a benefit if they have worked over 500 hours and the doc says you have to be employed on the last day of the plan year?

[Blinky the 3-eyed Fish]

Archimage, under what scenario would the active participants not accrue the benefit? They either stay active and are there on the last day or they terminate and satisfy the 500 hour requirement.

[R. Butler]

How does an active participant accrue a benefit if they have worked over 500 hours and the doc says you have to be employed on the last day of the plan year?

Maybe I am misunderstanding the question, but once the participant has 500 hours of service he has satisfied the requirement to receive an allocation. He doesn't have to be employed on the last day.

[Blinky the 3-eyed Fish]

One additional thought on this is that you could argue that only the compensation earned as of the date of of the change to the document is protected. For example, if you amend the plan to have the last day on 8/15, but the participant terminates 10/15, his allocation would be based on compensation through 8/15.

It's aggressive and only a thought. Personally, I wouldn't do it.

[Archimage]

I am throwing this out there for discussion. I would normally agree but thought this might make an interesting topic to discuss.

The standardized document (in most cases) imposes a last day rule for participants that are active. The hours requirement is only for terminated participants. Therefore the active participants do not accrue the benefit until 12/31/xx.

[R. Butler]

I would normally agree but thought this might make an interesting topic to discuss.

No it wouldn't.

The participant accures the benefit when he works 500 hours, the last day issue goes away.

[GBurns]

Please clear this up for me, iWhat is it that is required to get the benefit, is it.....

1. 500 hours AND last day?

2. 500 hours OR last day?

3. 500 hours IF you have terminated?

4. Last day if you are still employed?

5. 500 hours if you are still employed?

[g8r]

It's option 2. But, it's probably easier to state it as: you're eligible unless you terminate with less than 500 hours.

You share if (1) you're employed at the end of the year, OR (2) if not employed at the end of the year, you had at least 500 hours.

Once an individual has 500 hours, he or she will share regardless of what happens in the future. Therefore he/she is entitled to share in the allocation for that year. I also agree that it's debatable as to whether you're entitled to share based on compensation up to the date of the amendment changing the conditions. When terminating a plan I think a good argument can be made for that position. But, when the plan is onging, it's tougher to make that argument.

[R. Butler]

QUOTE 

I would normally agree but thought this might make an interesting topic to discuss.

No it wouldn't.

Archimage, I apologize for that last post. It was really unnecessary, its just my sarcastic sense of humor. The little man that sits on my shoulder told me to do it.

I too agree that an argument can be made that only compensation made thru the date of the amendment is protected. I wouldn't risk it. If you do risk it, you probably don't meet nondiscrimination safe harbors, so remember to test.

[Archimage]

No offense taken. Ultimately I think it is a matter of interpretation by the plan administrator and the conservative approach would be to accrue a benefit for those with more than 500 hours.

[Blinky the 3-eyed Fish]

I really don't think there is an argument for not accruing a benefit for someone with 500 hours, whether active, terminated, spayed, insane, redheaded, gimpy, perky or not. I don't think it's a matter of taking the conservative route. I think it's a matter of taking the correct route.

Again I would ask under what situation could an active participant not accrue a benefit in a plan year if they have already worked 500 hours? Answer... there is none.

BTW, I have that little man on my shoulder sometimes too. I try and flick him off, but the dude has some sort of tacky boots or something.

[Tom Poje]

Well put, oh 3-eyed one. Take the correct approach and follow the terms of the document.

On a related area, I had a plan once that had 0 hours if you died. pretty common language. One participant died and the company didn't want to provide a contribution, because death was a suicide. Plus the individual was only there a few years and you become 100% vested upon death.

[Archimage]

I agree mostly. I do think that an argument could be made the other way. Most standardized docs say that you have to be employed on the last day of the year and do not mention an hours requirement.

Personally, I would never advise a client to take this approach. I am just trying to get you guys thinking!

[R. Butler]

The standardized has to have the 500 hours requirement. It could be less than 500, but in that case they accrue a benefit even quicker. There is still no issue with the last day.

[Archimage]

Okay, guys. I concede. I see none of you are going to concede so I give up.

[R. Butler]

Victory at last!!! This is definetely a banner day.

[Blinky the 3-eyed Fish]

Way to come off that island, Archimage!