Client desires to retroactively amend plan to lower the service requirement for plan entry; plan year ended 6 months ago

[Guest wlank]

Client desires to retroactively amend plan to lower the service requirement for plan entry. That is, bring in some new employees for the prior plan year who were not eligible under the current plan.

Plan year ended 7/31/2003.

All I can find is the 2 1/2 month rule, and that has passed. I've heard that you can amend to increase benefits (include additional Participants) at any time, but I can't find any rules on it.

Yes - we're dealing with Doctors again. Their CPA is real conservative, and I am sure he'll want some sort of definite code guidance before he changes the Deduction on the 1120.

[Blinky the 3-eyed Fish]

What type of plan is this?

[Guest asire2002]

If your client had inadvertently allocated a contribution to persons who were not yet eligible to participate under the terms of the plan, the EPCRS would allow you to retroactively amend the plan to bring them in. (Not sure how the deduction rules play out in that situation but perhaps you could read the EPCRS revenue procedure and see if it is addressed -- I suspect it does not allow a deduction for the prior year.) But without an operational violation of that sort, I don't think you'll find anything definitive that you can point the CPA to that says retroactive amendments are allowed. I believe you can do it, but I don't believe you can claim a deduction for the contributions made on behalf of the employees that were retroactively let in. Under 404, a deduction is allowed for contributions authorized under the plan and these extra dollars weren't authorized under the plan for the year in question. Any contribution on their behalf would, in my opinion, be a current-year contribution based on prior year compensation, and deductible only in the current year. You could seek a private letter ruling on the deduction issue if you wanted.

[Guest wlank]

Blinky:

Profit sharing plan.

[Blinky the 3-eyed Fish]

Okay, then I would ask for what purpose is this amendment needed? Is there nondiscrimination testing that failed and will pass by bringing in these new employees? In that case a 1.401(a)(4)-11(g) amendment could be used.

Is it a safe harbor plan and the client just wants to bring in the people because he likes them? In that case, no, you cannot bring them in unless each person is already receiving the max annual additions, in my opinion. In this case, to bring people in would be a 411(d)(6) cutback, because other participants would receive less of a share of the contribution.

Is the reason for bringing them in as asire states? I wouldn't think so, since PS contributions often aren't funded until after year-end and you appear to be quite aware of the eligibility.

The 2 1/2 month rule is under 412©(8), is for plans subject to minimum funding (DB, MP, TB) and is not applicable here.

[Mike Preston]

There is no need to have a discrimination failure in order to use an -11g amendment. It is perfectly permissable to make such an amendment that puts these additional people in the plan. However, unless the fiscal year and plan years are different, the deduction for these employees will be pushed to the next fiscal, which I presume is not what the intention is at all and therefore renders the -11g amendment ineffective for what the client wants.

[Blinky the 3-eyed Fish]

Mike, are you saying you don't need any type of failure to implement an -11(g) amendment or are you pointing out that it also applies for failures other that nondiscrimination?

[Mike Preston]

The former. The IRS has made it clear that they would have needed to word -11g differently to force an -11g amendment to be curative. Instead, it happens to be curative most of the time, but there is absolutely no requirement for it to be so.

The IRS felt that it would be unfair to force an -11g amendment to be curative because to do so requires a plan sponsor to exhaust all permutations and combinations of non-discrimination testing before it could definitively be established that a failure exists.

[Blinky the 3-eyed Fish]

Then how do you deal with the 411(d)(6) issue? It would seem nonexistent if one called any amendment after the end of the plan year an -11(g) amendment.

[Mike Preston]

In the beginning (sounds like a typical fairy tale, doesn't it?) there was concern about 411d6 with respect to -11g amendments, whether they cured a problem or not. In fact, I don't see where -11g specifically overrides 411d6 in any manner.

So let me return the question: How do you get around 411d6 with respect to any -11g amendment?

The answer is, I think, that if you can do so with respect to a curative amendment, you can also do so with respect to a non-curative amendment.

The pattern I see followed most often is:

1) Contribute for year pursuant to document provisions in effect at EOY

2) Institute -11g amendment that states additional contributions for the prior year are being made pursuant to the terms of the -11g amendment

3) Deduct contributions made pursuant to -11g amendment on subsequent tax return (assumes FYE and PYE coincidence)

[could be me maybe not]

Like I said a year or two ago. When EF Hutton speaks....................Jeez.....

[could be me maybe not]

And, while we are discussing history, are doctors the cause of all of the regulations, or just the controlled group and affiliated service rules?

Not to mention the prohibited transaction rules I suppose.

[Guest wlank]

TO: could be

The answer is "D", all of the above