Timing of amendment to swith ADP/ACP testing method

[Guest moltengater]

Does anyone have a better feel of the IRS position of swithing testing methods from current to prior / prior to current either

1. before the plan year begins

2. before the end of the plan year

3. after the plan year within 12 month correction period.

I was just wondering what is being done in practice - I try to avoid amending after year is over because I've heard IRS say it should not be done. Just wondering.

ASPPA 2005 edition ERISA Outline book states following -

"Timing of amendment: Once the plan document reflects the testing method, what will be the deadline for making an amendment to change that method?

The IRS has not established a time frame for making such an amendment. There is a reasonable argument that the employer could adopt an amendment at any time before the deadline for correcting a violation of the ADP test (i.e., 12 months after the close of the plan year). In other words, the IRS should treat the choice of testing method as one of the corrective techniques in the administrator’s "arsenal," that should be available to help the test pass or to reduce the margin of failure. This is supportable by the restrictive rules for switching between methods after the GUST remedial amendment period ends.

2004 regulations do not address issue/IRS comments indicate narrow rule is contemplated.

The 401(k) regulations issued on December 29, 2004, do not address the issue of whether amendments changing the plan year must be adopted. It should be noted that, at the ASPPA Summer Conference in Irvine, California (July 29, 2003), representatives from the IRS and the Treasury were not enamored with the idea of making plan amendments to change the testing method after the close of the plan year. In fact, they indicated that the internal debate at the government is whether the amendment should be adopted by the first day of the plan year for which the amendment is effective or by the last day of such year. However, they seemed open to comments arguing a more liberal amendment rule. In the absence of guidance, plan sponsors (or their advisors) will have to decide for themselves what they believe is a reasonable interpretation of the law."

[Guest Bob K]

At last week's ASPPA/IRS Northeast Area meetings, the rep from Treasury indicated that if the change is from prior year testing to current year testing it must be done BEFORE the beginning of the plan year affected. She stated that there is language in IRS Notice 98-1 that uses the words "subsequent plan years".

Note that this language was dropped from the Final Regulations issued last December.

The language is there but this seems like a rather conservative position.

As for changing from current to prior year (assuming the 5 year or life of the plan requirement was met) the amendment could be done by the end of the affected plan year but not after.

Also, please note that the opinion stated was only her opinion and not that of the Treasury or IRS (the usual disclaimer given by government officials at conferences).

Hope this helps.

Bob

[R. Butler]

We have taken the more aggressive stance on 2 occassions. Until formal guidance is issued we feel comfortable with this primarily because there is no 411(d)(6) issue until the correction period has ended.

[MWeddell]

I used to be more aggressive on this issue.

However, when there isn't a deadline indicated (which I think is the case here despite Bob K.'s post above) and where none of the more specific deadlines applies (e.g. this isn't a remedial amendment period issue for a plan that already specifies a testing method), then the amendment should probably be done within the plan year in which it becomes effective. This is a general principle of tax law, not something where one can easily cite the relevant authority.

[ak2ary]

Dick Wickersham clearly believed that the amendment needed to be adopted prior to the beginning of the plan year... but he never wrote it down,, and he's not there anymore

The IRS is painfully aware of this question and has been for years. They have had ample opportunity to address it and have chosen not to. At each conference I have seen it mentioned, in the presence of IRS speakers the practicioner co presenter has said that in the absence of guidance they see no reason that it has to be adopted prior to 12 months following the plan year end

I think from a best practices standpoint there is more security in amending during the plan year. However, I believe in the absence of guidance to the contrary, the later amendment is more than defensible