Benefit Increase Amendment

[Guest penman]

DB Plan. Owner, Owners Wife and one employee. Part of the business was sold and the employee was involuntarily terminated and paid 100% vested lump sum in April 2004. The plan year ends 8/31/04. The plan is ongoing. The owner wants to amend the plan now to increase benefits. Would that be a problem? It just seems like something that smells bad to let the only rank and file ee go, pay her out, and then amend the plan to increase benefits to the owners. Thanks in advance for any advice/information.

[david rigby]

Sounds like a job for IRS Reg. 1.401(a)(4)-5.

By the way, this is GrayBook Q&A 96-33:

Nondiscrimination: Change in Vesting Schedule

A defined benefit plan with 5 year cliff vesting is amended to provide for 3-year cliff vesting for all participants employed on the date of the amendment. The active participant group satisfies the coverage requirements under §410(b).

§1.401(a)(4)-5 [amendments] requires a facts and circumstances review to prove the amendment isn't discriminatory. Specifically, it suggests looking to former employees and making sure that the timing of the amendment did not favor the highly compensated.

§1.401(a)(4)-11© [vesting] does not require testing former employees with respect to vesting.

To determine whether the amendment complies with §401(a)(4), must the effect on former employees be assessed (i.e., examining the relative number of HCEs and nonHCEs who had terminated during the years prior to the effective date of the amendment and would have benefited under the provisions of the amendment)?

RESPONSE

Yes. All amendments are subject to 1.401(a)(4)-5.

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[Guest penman]

Thanks Pax, that was very helpful.

[Guest penman]

What if the new formula only increased accruals going forward, any difference with respect to discrimination issues? Something like: (5% x YOP to 12/31/04) + (10% x YOP after 12/31/04 max 9).

[Blinky the 3-eyed Fish]

A prospective increase doesn't negate the facts and circumstances review of the amendment. However, in this situation, I don't believe you have a problem. There isn't a pattern with this client increasing benefits in the past when another employee terminated is there? Helping the facts and circumstances review is that the employee wasn't terminated on a whim, but through explanable circumstances.