Plan amendments after end of year

[Guest Gordy]

A law firm client brought in three attorneys as employees/shareholders to corporation "A" on 4/1/03. Secretarial staff may have been brought over also. The new employees all worked at firm "B" where the attorneys were owners. There was no amendment of A's plan to recognize service with "B" for any plan purpose. So, the new employees are subject to the terms of the plan-one year, age 21, 1,000 hours and dual entry = 7-1-04 entry.

The name of A corporation was also changed 4/1/03 and no change was made to the plan for this either.

OK. Apparently they didn't even consider the plan in this.

Can the plan be amended now, after the close of the 12/31/03 year, for recognition of service with B. Does it matter whether or not staff employees are involved as opposed to only HCEs?

Where is it written that shows what you can amend a plan for after the end of the year?

Thanks for any help.

[Blinky the 3-eyed Fish]

You don't say what type of plan it is, but I assume it's perhaps a profit sharing plan. Your first issue is if you amend the plan now and make a profit sharing contribution, then you, IMHO, violate the 411(d)(6) rules by adding additional people to receive the profit sharing contribution. I am sure some may argue this point.

Also, you cannot simply allow the HCE's to enter the plan and not the staff. That would be a discriminatory amendment.

[Guest Gordy]

Thanks, Blinky. This is a Profit Sharing Plan. There is a cut back issue because even if the plan could be amended to allow participation by the new employees, their salaries could not be included in the contribution calculation for the 03 year? Therefore, the other (original) employees receive a lesser allocation. Is that the theory?

The deduction based on the new employees '03 salaries would fall in '04 and be subject limitation in that year.

I looked a 1.401(a)(4)-11(g) and do not see that this situation fits. The requirement for being "corrective" seem lacking.

My thought on staff employees was that if staff were also comming over, it wouldn't look as bad as if only HCEs were.

[Blinky the 3-eyed Fish]

The issue is that you have an $X profit sharing contribution that the existing participants have accrued the right to. Now by amending the plan and allowing additional participants you are reducing $X by giving some to the added participants. That is the argument that the amendment would be an impermissable cutback under 411(d)(6).

The reality of the situation is that the contribution after the new employees come in may be $X + $Y, and that the existing participants may not be affected. This would be an argument that it is not a 411(d)(6) violation.

I believe that the IRS holds the former view of the situation though.