Plan design error

[rlb64]

Non-profit org's document for the first plan year ending 6/30/05 provides for 1000 hours of service and employed on the last day of the plan year condition to receive profit sharing allocations. The client did not intend to impose these conditions and has been submitting profit sharing contributions with each payroll from the start. There are no HCE's during the first plan year if this matters.

Any suggestions?

[mbozek]

Amend plan retroactively to eliminate the provisions.

[rlb64]

So, there isn't a 411d6 issue? I guess I should have mentioned the allocation is prorata based on compensation. It's not written to provide a % of compensation.

[mbozek]

I dont understand what the cutback is if the plan is amended since the plan initially required that participants had to be employed at the end of the year. If there is a cut back for some participants then amend the plan to give the the greater of the two formulas for the yr ending 06/05 and the revised formula for all plan yrs after 06/05.

[Blinky the 3-eyed Fish]

While one could argue there is a cutback issue, I think the facts would support amending the plan now to eliminate the the allocation conditions retroactively. The main fact being that the employer is depositing the contribution per pay period is a clear indication that amount is intended for each person. An IRS reviewer should clearly pick up that the amendment is an increase for those who didn't satisfy the allocation conditions rather than a reduction for those that did.

[Belgarath]

I prefer mbozek's solution. I'm very squeamish about a retroactive amendment that reduces the allocation otherwise received by those participants eligible for it under the terms of the current document.

[Blinky the 3-eyed Fish]

Well what is the greater of the two formulas for the 6/30 PYE? I see only one formula. If you are arguing it's a cutback, then you need to give to the 415 limit for everyone before you can give to those that didn't meet the allocation conditions to avoid the perceived cutback. Instead are you saying that you can only do the amendment prospectively Belgarath?

Normally, I too am not for changing anything that affects other participants in a PS plan with a discretionary contribution. However, with the facts in evidence (IANAL but I wanted to use that term anyway), there is a very good argument for doing so in this case and I would support the change.

[Belgarath]

Blinky - no, actually I wasn't thinking about the fact that there's only one formula. So now I'm going to have to consider this at greater length. My answer doesn't make much sense when the contribution isn't a specific % of pay.

I guess my answer would then be: tough luck for those who didn't receive an allocation. Maybe the employer can make it up to them with a bonus, and just amend the plan so they participate in year 2. I may well be overly paranoid. But I wonder what would happen if your approach was used, and a participant whose benefit was reduced complained to the DOL?

I haven't generally found the DOL to be overly reasonable or tolerant, and they have a nasty habit of elevating "form over function" to an art form.

What thinkest thou? Your approach may well be such a low risk that it isn't worth worrying about.

[rlb64]

Any thoughts on amending as a scrivener's error and going through EPCRS?

[Belgarath]

Here's the only specific reference to a scriveners error that I was able to find quickly. A less than definitive response from the IRS. I realize yours is a different situation entirely... but the "one way or another" is less than inspiring.

IRS QUESTIONS AND ANSWERS PRESENTED AT ASPA's 2002 ANNUAL PENSION ACTUARIES AND CONSULTANTS CONFERENCE

40. Assume a profit sharing plan with a one-year of service eligibility and 2/20 graded vesting. The TDR restatement of the plan in 1986 (for which there is a favorable determination letter)

reflects 2/20 vesting in the adoption agreement, the SPD, and plan administration. Everything was fine until it is discovered in 2001 that the TRA '86 restatement (signed in 1992, and has a

favorable determination letter on top of the 1986 letter) erroneously has the 100% vesting box checked on the adoption agreement instead of the 2/20 box. The SPD and the plan

administration continue to show and apply the 2/20 vesting schedule.

Will the Service approve a scrivener's error amendment to correct the vesting schedule election on the TRA '86 adoption agreement to the one that has been used for the last 18 years of

plan operation or must we retroactively fully vest everyone in the plan during the TRA '86 restatement?

IRS response: Fact and circumstances will determine the results, but the employer's only legitimate choice is to come in to the Service through VCP in order to resolve this one way or the other.

[Blinky the 3-eyed Fish]

But I wonder what would happen if your approach was used, and a participant whose benefit was reduced complained to the DOL?

Practically, no participant is going to take it as a benefit reduction because they will be getting the same contribution per pay period as before and because they wouldn't even compute that others are getting more. I really think it's a non-issue.

You could go the VCP route, but I just don't think it's practical in this case.

[mbozek]

Before considering EPCRS what is the amount of additonal contributions required? It seems to me that if some ee were supposed to get a greater contribution under the formula requiring 1000 hrs of service then the er should contribute the difference between that amount and the amount that was actually contributed. The 1000 hr requirement can be revoked retroactively because it is not a cutback and the plan can use the intended formula going forward. If the amount of the additonal contributions required is less than the cost of the EPCRS filing why bother getting involved with the IRS?