Retroactive amendments to increase benefits

[Belgarath]

Looking for some opinions on this subject. The question raised was, "Can you use 412©(8) to increase the formula retroactively?"

This really seems to break down into two issues - first, can you do it, and second, if so, is it deductible for the prior plan/fiscal year. For example, let's say that you have a calendar year 2005 plan and fiscal year, with a 12-31-05 EOY valuation date.

Can you, on 3-2-06, amend the plan to increase the benefit formula for plan year 2005?

In reading 412©(8), I find myself sitting on the fence. It appears to me that the purpose of this is to allow for retroactive amendments to REDUCE minimum funding requirements, but it also seems to leave room to increase benefits with a retroactive amendment. So, do you believe you can, or not? I'm inclined to lean towards the interpretation that you can.

Second, assuming that you can, what about deductibility? Is it deductible for fiscal year 2006, or not until 2007?

Thanks in advance.

[david rigby]

My understanding of 412©(8) is to give permission to recognize retroactive plan amendments for purposes of determing plan funding. Amendments that could (possibly) reduce benefits are given special language in 2 sentences in the flush paragrah, but that does not imply that the entire section is only for such amendments.

I conclude that nothing in this section would prohibit the proposed amendment, or prohibit recognizing the amendment to determine the minimum contribution. However, there might be a separate BRF issue under 401(a)(4).

[Guest Texas_Acty]

This really seems to break down into two issues - first, can you do it, and second, if so, is it deductible for the prior plan/fiscal year. For example, let's say that you have a calendar year 2005 plan and fiscal year, with a 12-31-05 EOY valuation date.

Check Rev Ruling 77-2 and Treasury Reg. 1.404(a)-14. RR 77-2 establishes the minimum funding treatment of retro amendments and Reg. 1.404(a)-14 ties the deduction for a tax year to the corresponding plan year. In combination, they seem to allow for recognizing the plan change for the 2005 year's minimum and maximum deduction as long as it was effective for the prior year.

Or, since the change was adopted in 2006, you could defer recognition for minimum funding standards to 2007, since the change was adopted after the 2006 valuation date.

Can you, on 3-2-06, amend the plan to increase the benefit formula for plan year 2005?

Yes

In reading 412©(8), I find myself sitting on the fence. It appears to me that the purpose of this is to allow for retroactive amendments to REDUCE minimum funding requirements, but it also seems to leave room to increase benefits with a retroactive amendment. So, do you believe you can, or not? I'm inclined to lean towards the interpretation that you can.

You indeed can increase benefits retroactively; 412©(8) has nothing to do with this. For example, back in the good 'ol days, companies that set up pension plans routinely established them on the basis of providing for past service benefits for long-service employees. You should probably rely on RR 77-2 and Reg 1.,404(a)-14 for justification, rather than 412©(8).

Second, assuming that you can, what about deductibility? Is it deductible for fiscal year 2006, or not until 2007?

You could recognize it prorata for 2006 or defer any recognition to 2007. Check RR 77-2.

[Blinky the 3-eyed Fish]

QUOTE

Second, assuming that you can, what about deductibility? Is it deductible for fiscal year 2006, or not until 2007?

You could recognize it prorata for 2006 or defer any recognition to 2007. Check RR 77-2.

The point of 412©(8) is to be able to amend the plan and recognize it for the valuation for the preceding plan year. If you don't recognize it, then it really is just an amendment and not a 412©(8) amendment. I know it's semantics, but you would never have a 412©(8) amendment that is recognized not until the next plan year.

Also, regarding 77-2, you simply avoid the hassle if you make the amendment effective as of the first day of the plan year. Unless you have a complelling reason not to do so, it's a no-brainer.

[Belgarath]

Many thanks!