Can you restate a MPPP into a 401kPSP?

[Guest Lisa Karlin]

Employer has maintained a MPPP with a 25% formula. Contributed 25% for PYE 8/31/03. Effective 9/1/03, employer wants to "amend" MPPP to a PSP. 401(k) deferrals will also be allowed effective 1/1/04. Participants will get 204(h) Notice about change. Can employer adopt the 401(k)PSP as a restatement of the MPPP -- i.e., no final 5500, no new trust ID, no new Plan #?

[Blinky the 3-eyed Fish]

Yes, but you must keep in effect the distribution restrictions and J&S requirements attached to MP dollars.

[wmyer]

I agree with Blinky except for the timing. If you don't have a last day of the plan year rule, you can't restate the plan retroactively to September 1, 2003. The 204(h) notice must be provided within a reasonable time before the benefit reduction.

[Blinky the 3-eyed Fish]

Your 411(d)(6) concerns are valid, but the the criteria is when the right to the allocation is earned, not just if there is a last day requirement. For example if there was a 1,000 hours requirement, that would not have been satisfied either by this time. Also, even if there was no allocation requirement, the MP allocation could be limited to the compensation paid to the effective date of the amendment, as allowed by 204(h), arguably.

[billfgrady]

What would happen if, as in Blinky's last example, there was no allocation requirement for the MPP, you restated the plan into a 401(k) PS Plan as of September 1, 2003 and all of the participants (who are HCEs) contribute the 40,000 maximum for the plan year ending 8/31/04? Are you saying that a MP contribution is required based on comp. earned between 09/01/03 and the date of the amendment? What about the overall contribution limits?

[Blinky the 3-eyed Fish]

IMHO, I would administer the situation as such if there were no accrual requirements.

Say the 204(h) notice was dispersed today for a small plan, so the freeze could be effective January 15, 2004.

The contribution to the MP plan is 10% of compensation. So, all participants have accrued a right to 10% of compensation from the period of 9/1/03 - 1/15/04. For one specific person, let's say that is $1,500.

Amend the MP plan into a PS plan effective 9/1/03, include some additional language in the allocation section of the document to reflect the fact that participants have earned the right to some contributions ($1,500 for the example participant above).

Now allocate the contribution based on the restated PS document, but make sure that each participant gets no less than what they earned in the MP plan before it was frozen.

I know some will argue that this is aggressive and that the contribution formula to the plan cannot be changed because the participants have satisfied the right to the allocation under the MP formula. However, the exact situation could be accomplished by just freezing the money purchase plan and starting an new profit sharing plan. I know this is not the criteria to ultimately rely on, but it produces a good argument on why it is allowable.

[billfgrady]

Under these circumstances, how would you answer question 12a of the Form 5300?

[Blinky the 3-eyed Fish]

How is that applicable?

[billfgrady]

We're talking about the elimination of a section 411(d)(6) protected benefit, aren't we? If the employer decides to apply for a determination letter (and assuming it does so on Form 5300), how would you answer question 12a on Form 5300, "Does any amendment to the plan reduce or eliminate any section 411(d)(6) protected benefit, including an amendment adopted after September 6, 2000, to eliminate a joint and survivor annuity form of benefit?"

I'm of the opinion that, in the setting we've discussed where all of the participants get the equivalent benefit in terms of a contribution from the 401(k) PS plan that they had accrued under the MPP from September 1, 2003 through January 15, 2004, and, assuming that the plan does not do away with the QJSA with respect to the MPPP funds, you could answer this question "no." Take a look at Reg. 1.411(d)-4, A-2(a)(2): "A Plan may treat a participant as receiving his entire nonforfeitable accrued benefit under the plan if the participant receives his benefit in an amount determined under the plan that is at least the acturial equivalent of the employee's nonforfeitable accrued benefit payable at normal retirement age under the plan." Does this apply here or am I off base?

[Blinky the 3-eyed Fish]

You would answer "no" for 2 reasons. One, because to do this you are taking the position that the benefit protected is only that earned to 1/15/04. Two, because you cannot eliminate the QJSA with regard to MP dollars. The last cite you quote is not applicable because the optional forms regarding accrued dollars are not being altered.