Nondiscriminatory Amendment

[John Feldt ERPA CPC QPA]

Under 1.401(a)(4)-5(a), a plan cannot be amended in a way that discriminates significantly in favor of the HCEs. THis is based on relavant facts and circumstances. Does anyone have any guidance or opinion with what the IRS would view as significant or insignificant here?

Here's the situation: the plan requires 1000 hours for a year of vesting service, they have 5 HCE doctors and 9 or 10 NHCEs. They usually have 1 to 3 NHCES leave each year and they are replaced by rehires. This year, 1 doctor left with under 1000 hours and was only 80% vested, the 20% nonvested portion is over $40,000. Two of the other 4 HCEs are still not yet 100% vested either, but they're still working. Some of the NHCEs are fully vested, some are not.

Would it be a significant favor to the HCEs if the plan is amended to only require 200 hours for vesting only for 2006? (Assuming 1 or 2 nonvested NHCEs also leave with over 200 but under 1000 hours)

Or would it be a significant favor to the HCEs if all participants' vesting was bumped up by one year (this would now increase 3 HCEs, not just one, but it would help several NHCEs).

Any other ideas?

[Tom Poje]

lets see, in the past when NHCEs quit vesting was never increased.

this year, an HCE quits and vesting is increased, which amounts to 40,000 to the individual.

despite the fact there are a few NHCEs who quit this year, it smells bad. in fact, why would the question even be posed if it didn't?

of course, that is my opinion only.

supposedly if you receive a determination letter then the IRS has given its approval.

so, if you were to request one of those, citing the facts and circumstances you mentioned, what do you think the IRS response would be?

[E as in ERISA]

I agree. If you want something to go back to the client with, note that the ERISA Outline book points out that IRC 411(a)(10)(B) and ERISA 203©(1)(B) require that employees with at least three years of service be allowed to stay on the prior schedule even if you amend it back...

[E as in ERISA]

The ERISA Outline book also has a discussion of changes in vesting in the context of the Heinz case. It says that the proposed regulations that the IRS issued after that case would allow the employees to be on the prior schedule that was better even if they don't have three years. Otherwise you have cutback under 411(d)(6). And it cites proposed regulation 1.411(d)-3(a)(3).

[E as in ERISA]

I know that those speak to the schedule not the hours. But it seems similar principles could apply.

[John Feldt ERPA CPC QPA]

Tom and E,

Thanks for the info. We had already drafted the warning to the client about this and it's good to see our own conclusions were the same as yours.