Plan has prior year testing, but testing done on current year information.

[Guest phyphy]

A plan with several adopting employers was erroneously tested using the current year method when the document states prior year. The employers are not members of a control group and are not tested together. I have three questions:

1. What is the time period for changing from prior to current year testing? Can the plan be amended during 2004 for a December 31, 2003 plan year?

2. What is the correction/impact for refunds made in excess of the corrective distribution amounts? Are the overpayments to be made back to the Plan in the same correction manner as a test using incorrect data?

3. What is the correction/impact for refunds made that are less than the corrective distribution amounts? Assuming that additional refunds are made prior to December 31, 2004, are the residual payments made after March 15, 2004 the only amounts subject to the 10% excise penalty? Do the HCEs then receive two 1099-R forms for 2004, one coded "P" for amounts taken prior to 3/15 and another coded "8" for amounts after 3/15?

Thanks!

[Guest Tinman42]

1. What is the time period for changing from prior to current year testing? Can the plan be amended during 2004 for a December 31, 2003 plan year?

You can make the change in 2004 for the 12/31/03 plan year.

2. What is the correction/impact for refunds made in excess of the corrective distribution amounts? Are the overpayments to be made back to the Plan in the same correction manner as a test using incorrect data?

Yes, the participants should repay the extra amount and the 1099 should be corrected to reflect the true amount.

3. What is the correction/impact for refunds made that are less than the corrective distribution amounts? Assuming that additional refunds are made prior to December 31, 2004, are the residual payments made after March 15, 2004 the only amounts subject to the 10% excise penalty? Do the HCEs then receive two 1099-R forms for 2004, one coded "P" for amounts taken prior to 3/15 and another coded "8" for amounts after 3/15?

That is how we've handled this in the past - cut a check for the additional amount, ER pays 10% on additional amount, and participant receives 2-1099s reflecting the pre-3/15 and post-3/15 amounts.

[MWeddell]

What's the source for Tinman's answer to question 1 above? Do others agree that it's not too late to amend a plan to change from prior year to current year testing method?

[Blinky the 3-eyed Fish]

This has been discussed many times on this board. Use the search feature and I think you will find there is no definitive answer.

[KJohnson]

Neither 98-1 nor the proposed regs address timing. In 1998 and 1999 you heard all of the IRS officials say that once the remedial amendment period was over, it had to be in the Plan prior to the begining of the Plan Year. According to an article in this month's Journal of Pension Benefits some IRS representatives have said that an amendment during the year would be o.k. I doubt anyone has heard an IRS official condone an amendment after the end of the plan year, but Blinky is right that there is nothing in any official guidance to my knowledge. The article in the Journal speculates that you might have a cutback issue for an after-year-end amendment in the unlikely event that a plan mandates a QNEC as a correction mechanism.

[Guest FAQ]

The American Benefits Council submitted a comment letter to the IRS regarding the proposed regulations noting that "Further clarification is needed on the extent to which testing methods may be changed during or after a plan year."

The Benefits Council interprets current guidance as allowing a change during the plan year (continuing with quotes from the letter):

"Notice 98-1 permitted a plan to be amended to change from the prior year testing method to the current year testing method 'for any subsequent plan year.' [My copy of 98-1 actually refers to any subsequent testing year.] The Proposed Regulations now state that a plan is permitted to change from prior year to current year testing 'for any plan year.'[Prop. Reg. 1.401(k)-2©(1)] The elimination of the term 'subsequent' from the language in Notice 98-1 appears to confirm that a plan could be amended during the plan year or after the end of the plan year to change from prior year to current year testing. Nevertheless, there have been some suggestions that a plan cannot be amended to change testing methods after the end of the plan year..."

Nothing definite there, but more food for thought.

Here's the link to the comment letter:

http://americanbenefitscouncil.org/documen...ltr_oct2003.pdf

[Guest hyper]

I have never been comfortable retroactively amending plans unless in a remedial amendment period.

I also have a cut back concern, but a little different than Kjohnson. Retroactively changing the testing method and forcing corrective distributions that are in excess of the distributions required by the prior testing method may be considered a cut back in benefit for some participants, unless you get blessing under EPCRS.

[Guest FAQ]

According to an article in this month's Journal of Pension Benefits some IRS representatives have said that an amendment during the year would be o.k.  ...  The article in the Journal speculates that you might have a cutback issue for an after-year-end amendment in the unlikely event that a plan mandates a QNEC as a correction mechanism.

Does KJohnson or anyone else happen to have the the title of this article from the Journal of Pension Benefits, or the page number of the article? I presume it is from the Spring 2004 issue, since KJohnson noted that it was from April 2004 and this journal is published quarterly.

The publication is not available on Lexis or Westlaw and I am trying to get a copy of the article via a remote library, but would prefer not to have the whole issue copied and sent if I can avoid it.

Thanks in advance!

[KJohnson]

Winter 2004" Be Careful What You Wish For: The Proposed 401(k) Regulations are Here" pp. 8-9

[Guest FAQ]

Found the article -- Thanks KJohnson.

[Guest FAQ]

We've got final 401(k) regs, but the IRS apparently did not take the opportunity to clarify the timing requirements as to adoption of an amendment to change a plan's testing method. In light of the new regs, has anyone heard anything informal or otherwise regarding whether the IRS would allow an amendment now (in 2005) changing from prior year to current year testing for 2004?

Thanks.