Allocation Groups

[Guest avascoe@hmvcpa.com]

Can anyone explain the rules regarding moving NHCE into a rate group with an HCE in order to pass testing? I have been told you can do this but it sounds a little fishy to me. I don't understand how you can give people in the same class different allocation rates-or do you have to amend the document? If so, when does it have to be amended by and do you list those people in a class by themselves?

[Jim Chad]

Did you mean "move an NHCE into a different allocation group"? This way the NHCE would get a different contribution amount and be in a different rate group. My understanding is that the allocation group is defined in the document.

Another way to put people into a higher rate group for testing would be to give everyone in the allocation group of that NHCE a higher contribution amount.

As for your question about amending; you can amend until someone has met all allocation requirements. Are you looking to amend after the Plan Year has ended?

[Guest avascoe@hmvcpa.com]

Yes, I want to move a NHCE into another allocation group but right now the document only has three classes (I would have to amend). I don't want to give everyone the higher allocation percentage as I am trying to reduce the client's cost. This would be something I would need to implement for 2007, I wasn't sure when they were considered to have met all of the allocation requirements, seems like it would be different for different people.

[Jim Chad]

Probably, your only chance is if there is a last day requirement to reciceve an allocation. If this is a calendar year plan, no one will have met the requirement until December 31st.

If all you have is an hours requirment, as soon as one Participant has the required hours, you cannot amend to change the allocation groups. IMHO

[AndyH]

True unless the test fails.

Then you can correct the test failure by amending under 1.401(a)(4)-11(g) to "increase" allocations perhaps selectively. If by increasing the allocation(s) the test happens to pass and that happens to produce a more desirable result then you've found a trick.

I am in no way advocating this, just supplementing the earlier answer. I found this trick in Tom's book. (just kidding)

[Mike Preston]

There is no requirement to have the test fail in order to do an -11g amendment, after the end of the year, to cause a special allocation with respect to the prior year. While it is unusual to do so unless you think the tests might have failed, there is no requirement to prove that the tests have failed.

[AndyH]

Mike, would you elaborate?

11-(g) is titled "Corrective amendments".

Section (2) reads "Scope of corrective amendments: For purposes of satisfying the minimum coverage requirements of section 410(b), the nondiscriminatory amount requirement of .....(a)(4).......a corrective amendment may increase accruals or allocations ........"

How could one justify applying a corrective amendment authority to something that does not need correction?

[Mike Preston]

You will note in that section the requirements for such a corrective amendment. Nowhere in there will you find anything that requires you to determine that the tests have authoritatively failed. From the beginning, the IRS was quick to point out that it was not necessary to invoke the Burrows^[1] rule in order to allow an -11g amendment.

^[1]The Burrows rules essentially states that one can not prove that a plan has failed the non-discrimination tests unless the plan sponsor has run out of money to use for fees that could be used to pay the consultant to run yet another analysis under the non-discrimination rules.

[J Simmons]

So if there doesn't need to be a failure in order to do an -11g corrective amendment, does -11g completely eviscerate the rule that the plan be operated in accordance with its documentary provisions? Does the DoL concur with the Service on this?

[Mike Preston]

I don't see the relevance of your statement. An -11g amendment is an "amendment" and therefore the plan is operated in accordance with its terms. Can you explain why you think the DOL would have a problem with allowing an amendment to a plan in accordance with IRS regulations?

[Jim Chad]

I have seen 11(g) amendments do many things. But this thread refers to something I have not seen. Can an 11(g) amendment be used to change the allocation classes in a new comparabilty plan after the end of the Plan Year?

[AndyH]

No, I was not suggesting that. Such an amendment can "add" something to someone, so it can have the same effect as elevating someone's class. Just give the selected correctees additional $$ or %% which can have the same effect.

BTW, Mike, I cite the Burrows rule all the time so I get what you are saying. I did run across one exception to it though........

[Guest merlin]

There was a question posed in the ASPA IRS Q&As a few years a few (pre-PP) years ago where the plan sponsor wanted to add an allocation group to give a LARGER allocation to certain employees after the allocation requirements had already been met. The IRS answer was that this would violate the anticutback rules, and suggested the use of an -11(g) amendment as a way to achieve the desired result.

[12AX7]

I would like to make sure I'm understanding the 11-g amendment process correctly. Suppose a plan has 2 allocation classes (HCE and NHCE). If the employer is not satisfied with the results of the General Test after the end of the plan year, the employer is able to amend the plan at such time to create additional allocation classes that could result in either a higher or lower contribution for one or more participants, compared to the pre-amended allocations?

[Mike Preston]

Higher only. An -11g amendment must satisfy 411d6 (that is, it can't take anything away). It also must satisfy the rules as stated in -11g. Read them lately? They aren't really surprising, but the one issue that trips some folks up is that the "addition" be non-discriminatory in and of itself, not just that the full non-discrimination test pass.

Assume you have your two groups. You look at the test and note that, while you can't give an additional 1% to the HCE group as a whole, you CAN give an additional 1% to a specific HCE (the one that is longest in the tooth). If you put in an -11g amendment that creates a 1% contribution solely for that HCE, it fails because standing on its own it would not satisfy 401(a)(4).

Note also that -11g amendments create contribution amounts which are not deductible in the prior year (in the case of a plan and fiscal year which are identical), so you end up taking the deduction in the following year. This might be disadvanatageous.