Last-day requirement in standardized m&p plans

[Guest Hilarion]

My boss is telling me that a standardized m&p may have a last-day requirement for allocations. He says to look in the 416 regs, and I have, but I don't see anything there to support his argument.

Rev. Proc. 2000-20 says, in Section 6.12.1, "A standardized plan generally may not deny an accrual or allocation to an employee eligible to participate merely because the employee is not an active employee on the last day of the plan year or has failed to complete a specified number of hours of service during the year."

Q 3:6 in the 2004 401(k) Answer Book says, unequivocally, "Also, a standardized document MUST provide a terminated participant who works more than 500 hours of service in a plan year an allocation of the employer's contributions." (emphasis added)

My boss is hanging his hat on the word "generally" in the passage from Rev. Proc. 2000-20. He discounts the 401(k) Answer Book, and tells me to keep researching. Should I?

[WDIK]

It has been my understanding that the last day requirement is one of the provisions that distinguished a non-standardized prototype document from a standardized.

[mwyatt]

I'd say your boss is confusing the 416 top heavy minimum contribution requirements, which do provide for a participant to be employed as of the last day of the plan year to receive the TH minimum, with the general requirements for the employer contribution. As WDIK indicated, standardized docs by default utilize the 401a4 fail-safe eligibility of 501 hours or last day; non-standardized prototypes can avail themselves of 1,000 hours/last day eligibility, but you do need to check to make sure you're passing the coverage tests in this instance.

[R. Butler]

Its just common sense you can't have a last day in in a Standardized plan. Standardized plans are designed to ensure that the plan will 401(a)(4) & 410(b).

[Guest Hilarion]

I printed off the above thread, and took it to my boss. He says that this doesn't tell him "*?%#." Next stop is the ERISA Outline Book.

Thanks to everyone who has responded. You've all told me what I knew to be the case. Boss-man's insistence had sowed the seed of doubt. (He's usually a reliable source.)

[R. Butler]

I'd be surpirsed if the ERISA Outline Book did not have this clearly spelled out for you. It answers every other question & this one is fairly basic.

[Belgarath]

Tell your boss to look at Section 4.12 of that same Revenue Procedure 2000-20.

REV-PROC, PEN-RUL 17,299P-27, Rev. Proc. 2000-20, I.R.B. 2000-6, February 7, 2000. [Modified by Rev. Proc. 2000-27 at ¶17,299P-34, Rev. Proc. 2001-55 at ¶17,299P-83, Rev. Proc.

2002-73 at ¶17,299Q-53, and by Rev. Proc. 2003-72 at ¶17,299Q-87.]

.12 Standardized Plan —A “standardized plan” is an M&P plan that meets the following requirements:

1 The provisions governing eligibility and participation are such that the plan by its terms must benefit all employees described in section 5.16 (regardless of whether any employer is

treated as operating separate lines of business under §414®) except those that may be excluded under §410(a)(1) or (b)(3). The adoption agreement may provide options as to whether

some or all of the employees described in §410(a)(1) or (b)(3) are to be excluded, provided that the criteria for excluding employees described in §410(a)(1) applies uniformly to all

employees. A standardized plan generally may not deny an accrual or allocation to an employee eligible to participate merely because the employee is not an active employee on the last

day of the plan year or has failed to complete a specified number of hours of service during the year. However, the plan may deny an allocation or accrual to an employee who is eligible

to participate if the employee terminates service during the plan year with not more than 500 hours of service and is not an active employee on the last day of the plan year.

[E as in ERISA]

A standardized plan may have a last day requirement -- but it can only apply for those with less than 500 hours. The "generally" is a reference to the 500 hour exception.

How about the language in the IRS' List of Required Modifications for Defined Contribution Plans:

"25. Document Provision:

Statement of Requirement: Profit-sharing plan -- definite

allocation formula, Regs. §1.401-1(b)(1)(ii), §1.401(a)(26)-6(b)(7), §1.410(b)-6(f).

Sample Plan Language:

Employer contributions will be allocated to each participant who either completes more than 500 hours of service during the plan year or who is employed on the last day of the plan year in the ratio that such participant's compensation bears to the compensation of all participants.

(Note to reviewer: A plan that utilizes elapsed time in lieu of counting hours of service may substitute the completion of either 91 consecutive calendar days or 3 consecutive calendar months for 500 hours of service in the above sample language.)

(Note to reviewer: A nonstandardized plan may require, as

an option on the adoption agreement, up to 1,000 hours of

service.)"

[g8r]

As a last resort, have him read the standardized document he is (or intends on using). You have to follow the terms of the plan you adopt, regardless of what the IRS allows or doesn't allow in a prototype. That's what reliance is all about.

If you're actually drafting a prototype for submission to the IRS, have him put the provision in the plan. He can argue with the IRS reviewer (and maybe you could listen in to get a good laugh).

[david rigby]

Boss-man's insistence had sowed the seed of doubt. (He's usually a reliable source.)

Hmmm. What to conclude about previous "reliability"?

[Archimage]

So did you convince him yet?