Converting PS to New Comp

[Guest MMorgan]

We have a client with a calendar year end plan profit sharing plan. He would like to restate the plan using a "new comp" type allocation formula for period ending 12/31/98. He is taking the position his profit sharing plan is discretionary and therefore he should be able to change formulas at this late date. I am concerned about all the employees already working 1000+ hours. I think it is too late for a change for the '98 year. Am I right or wrong?

Thanks for any insight.

[LCARUSI]

I think you can avoid the whole issue as follows:

1) Leave the current allocation formula in the Plan. Presumably, the Employer will allocate $0 for 1998 and future years under this formula.

2) Add a new comparability allocation and make the contribution under this "component" of the Plan. Clearly, it is not to late to add this feature for 1998.

[Lynn Campbell]

I think whether or not you can do this hinges on your Plan document. Does it contain language that requires employees to be employed on the last day of the year to get an allocation? If so, I think you are in a much better position.

[Guest Gary Tencer]

A possible answer can be found in PLR 9109067. If the Profit Sharing Plan has a "last day" employment rule.

"Under the plan's provisions, contributions are not allocated to participants until the last day of the plan year. Thus, the participants are not entitled, and have not "accrued" a contribution for a plan year until the last day of that plan year. Therefore, because the plan was frozen by a resolution adopted on June 8, 1990, BEFORE the last day of the plan year, the participants' accrued benefits were not reduced as of the adoption date of the amendment. Accordingly, it is not necessary to obtain approval under Code section 412©(8) in order to reduce the contribution rate of the plan."

[Dave Baker]

Kewl -- I like LCARUSI's idea. The IRS recently officially blessed the use of a new comp plan in which the employer makes contributions on a discretionary basis to each of two classes of employees, as long as the employer specifies in writing to the trustee how much is being contributed to each class. So if the plan is amended to add a "cross-tested" class consisting of all employees but under which the employer's contribution is spread under some cross-tested formula, then the employer ought to be able to specify to the trustee that $0 is to be allocated to the "profit sharing" class and all of the year's contribution is to be allocated to the "cross tested" class.

Maybe the IRS would argue that the employer basically is discontinuing contributions for the profit sharing class, such that full vesting is required under the Code section that talks about complete discontinuance of employer contributions.

[Lorraine Dorsa]

At the last 2 ASPA meetings and in various discussions over the last 2 years the IRS has consistently taken the position that once a participant in a profit sharing plan becomes eligible to share in the allocation, he is entitled to his share of the profit sharing contribution made to that plan as allocated under the allocation formula in effect at the time he became eligible. Depending on the document, a participant becomes eligible on the last day or 1000 hours or last day & 1000 hours or 500 hrs & terminated or even deceased on 1st day of the plan year. Therefore, once any participant has become eligible, it is too late to amend the formula in the plan.

The argument that the contribution is discretionary and therefore can be changed does not work because while the AMOUNT of the contribution is discretionary, the allocation METHOD is not. (To be qualified, a profit sharing plan must have a definitely determinable allocation formula.)

To provide flexibility for my plans, I am using a 1000 hrs/ last day requirement (no exception for deceased, retired, disabled) on all my profit sharing plans. This allows the plan to be amended at any time before the end of the plan year.

If you have a plan with other than last day requirements and someone has already become eligible under the current formula (which is probably the case with most standardized prototypes or 1000 hour only plans by this late date in the plan year), there is no reason why you could not adopt a 2nd profit sharing plan with the new formula and then have the employer contribute $0 to the old plan and $X to the new plan.

(Dave suggests something that sounds similiar in his message above. My concern with his method is that he would be changing the allocation formula in the plan after someone has become eligible - e.g. changing from non-integrated to by classes. Maybe he could argue that he is adding a second and unrelated profit sharing feature to the plan, but that's too far a stretch for me.)