plan amendment

[Guest lindamichals]

Are there any issues with amending the plan to change the definition of compensation that states whether to consider comp for the non-elective portion from date of entry or entire year? I have a client who has had his plan for 2 years and wants to change from entire year to from date of entry. Thank you.

Linda Michals

[Guest hyper]

Linda:

I am not sure what kind of non-elective contribution you are referring to but if it is a fixed contribution amount allocted on a comp to comp basis the amendment could reduce the allocation % for participants who have been eligible all year.

Example, ER contribution is $5,000 and the allocation is based on compensation of the EE divided by compensation of all Ee's.

Ee 1 earns $50,000 yr and is eligible for the plan in July so only only $25,000 of Ee 1 comp. is eligible to be included in the allocation formula. Ee 2 also earns $50,000 a year but is eligible for the plan all year, so all his comp. is included in the allocation formula. Currently EE 1 receives $1,666 (($25,000/$75,000) X $5,000) and EE 2 receives $3,333 (($50,000/$75,000) X $5,000)

If the compensation definition is changed to include all compensation for the year, the ER contribution would be split 50/50.

If there is a last day rule in the plan, this is not an issue becasue no one has any vested interest in the contribution yet.

[Guest hyper]

Whoops. I think I got my example backwards but the issues would be the same. Ahh, Friday afternoon !

[Guest lindamichals]

contribution is a discretionary profit sharing, he wants to make the amendment effective 1/1/04 changing the considered compensation from entire year to from date of entry. Does this change things?

[austin3515]

Because the plan has a last day rule no one has yet accrued a benefit, and you can therefore amend the Plan to change the defition of comp in a way that decreases allocations. Do a search on terminating Money Purchase plans/merging into PS plans, and you will see a lot of discussion on this question.

[pmacduff]

I didn't see anywhere where Linda said her plan has a last day rule. IMHO, the amendment to recognize comp from date of participation only would have to be effective 01/01/2005 and cannot be used in 2004.

[Blinky the 3-eyed Fish]

I don't see anywhere where she says the plan does NOT have a last day amendment. We might want to find out if any participants have accrued the right to the allocation before offering any more opinions.