Reduction of cross tested percentage to NHCEs from 7% to 3%, but 5% has already been deposited into Participant accounts. Can cash be removed?

[Guest ChopperPilot]

Can an Employer sponsoring a cross tested 401(k) PSP that had made quarterly deposits throughout 2004, decide to change their minds now and reduce the employer allocation formula for 2004? Specifically, the client wants to remove ER PS contributions from each Participant's PS source. This is an allocated plan. Bottom line: they feel 7% is too rich of a benefit and they want to scale it back to 3% for 2004 and for future years.

[david rigby]

... decide to change their minds now...

Now? Wouldn't that be a cutback under 411(d)(6)?

Check plan provisions?

[mbozek]

Why not skip the contribution for 05 which will make it even without violating the cutaback rule. ( Cant reduce the account of a participant by plan amendment after contribution has been allocated to account)

[Bird]

I'd be curious to know how the allocation language reads, but I'm not so sure it really matters.

If you have groups, then the administrator is supposed to tell the trustee how much is allocated to each group. If contributions were made quarterly, there's an implication that the amounts to go to the groups were in fact determined and I'd argue that taking money out would be a cutback. Putting it another way, you shouldn't be taking money out of the plan, period, and I can't imagine a scenario given these assumptions where it would be OK to move money from some participants to others.

If the allocation is hard-wired, such as with a super-integrated plan, and you decided not to make any more contributions and discovered after the fact that there were misallocations, and you had to move money from certain participants' accounts to others, I'd say that's OK. But I'm guessing that's not the situation here.