Plan Amendment timing

[Guest hyper]

We would like to amend our (k) Plan to increase the population that is eligible to receive the 2005 profit sharing contribution. Revenue Procedure 2005-66 (generally deals with EGTRRA amendment timing) says a "discretionary amendment" must be adopted before the end of the plan year in which the plan amendment is effective. A discretionary amendment is defined as an amendment that is not required by EGTRRA. Rev Proc Part II, Section 5.05(3) is definition of discretionary amendment). This provision would prevent us from amending the plan in 2006 effective back to 2005.

Does anyone think Revenue Proc. 2005-66 requires all "discretionary amendments" to be adopted prior to the end of the year in which effective ? (regardless of the amendment timing provision of 401(b))

I spoke with an IRS agent on this issue and he claimed the Rev Proc "discretionary amendment" definition was only meant to apply to amendments optional under EGTRRA, not any plan amendment that was not required by law. The Rev Proc. is not clear.

Any insite is apprecitated. Thanks.

[Locust]

There is IRS guidance out there that says you can't add or subtract to the group eligible for the profit sharing contribution after the end of the year because of the definitely determinable benefits requirement.

In a profit sharing plan the definitely determinable benefits requirement says that once a profit sharing contribution is made (or set, such as a forfeiture or fixed contribution), the plan must say exactly who will get it and how it will be allocated. Everything must be set at the end of the year (a contribution made after the end of the year is deemed made on the last day of the year for this purpose).

Also, I would look at as if it were a new plan - you couldn't put a plan in place in 2006 for this new group of participants and make a 2005 contribution to the new plan.

Maybe you could make an additional 2006 contribution for this new set of participants - if you can get past the nondiscrimination and deduction limits.

[Guest dbvail]

There is a very good thread on this already, somewhere here. But I think the end logic was something like this: assume a $50,000 contribution would be allocated to 10 like paid participants resulting in each getting $5,000, according to the existing plan formula. Now, being a nice guy, the employer wants to expand the eligibility to include 10 more people (not his relatives and friends, of course). Now the new requirments spread the $50,000 out to 20, and the result is an allocation of $2,500 each. This new 'improvement' after the accrual date results in a 'loss' of plan benefit to the original group. It's ok going forward, but if the original 10 had met the plan requiremnts, and this amendment reduces their share, then it doesn't seem to work. Others will help, but that's our take on it. Good luck.

[Bob R]

I agree. There's a (1994?) Technical Advice Memorandum on a similar fact patter. The IRS position is that amending the plan to expand the group who are eligible results in a prohibited cut-back of benefits that violates IRC 411(d)(6).

[R. Butler]

I agree. There's a (1994?) Technical Advice Memorandum on a similar fact patter. The IRS position is that amending the plan to expand the group who are eligible results in a prohibited cut-back of benefits that violates IRC 411(d)(6).

I've never really understood that position though. If hyper just inadvertently included those people & caught it a little bit later wouldn't the perscribed correction be to retroactively amend the plan? (I am assuming this brings in predominately NHCE's.)

[Guest Pensions in Paradise]

Which part of the posts from Locust, dbvail, and Bob R did you not understand? The IRS is quite clear on this issue, you cannot retroactively expand the group of participants. And if you inadvertently include extra people, the correction is to put all of the participants in the position they would have been in had the error not occurred.

[R. Butler]

Which part of the posts from Locust, dbvail, and Bob R did you not understand? The IRS is quite clear on this issue, you cannot retroactively expand the group of participants. And if you inadvertently include extra people, the correction is to put all of the participants in the position they would have been in had the error not occurred.

You seem to be a little feisty today.

My only point is that the IRS position stated by Locust, dbvail & Bob R do not seem to be consistent with the position that the IRS provides as part of the EPCRS. I was questioning the reason for the apparent inconsistency. Apparently my simple mind to doesn't grasp these issues as firmly as you do.

[Guest Pensions in Paradise]

EPCRS does indicate that a participant's accrued benefit cannot be reduced to correct errors. For example, see Appendix B, Section 2.02(2)(a)(ii).

[Trekker]

May I raise again Hyper's question with a slight difference?

Our fact situation is similar. Employer wants to expand population for 2005 but wants to make additional contributions for the added people. This would not reduce current participants' allocation.

The Employer is on extension for its corporate return.

Can this amendment be done?

Thanks!

[Bird]

No. The thinking is that without the amendment to add participants, if you made the extra contribution, other (existing) participants would get more. If you do the amendment, then the existing participants will get less than they would have otherwise. It doesn't matter that you had a contribution of "X" in mind and want to increase it to "Y" by adding participants and money.

[namealreadyinuse]

Can this amendment be done?

What works (no cite of course) is to amend the plan to add a new contribution mechanism and call it something like a super-duper profit sharing II contribution to give to the new group. If it is equal to the first contribution, it passes testing (right?).

Lots of smart people on this board will rightly criticize this approach and it is not guaranteed to work. Proceed with caution (and legal help).