Issues associated with cut backs due to change in HCE determination

[Guest sui generis]

We have a calendar year (2008) non safe harbor DB plan that excludes non-key HCE's from participation. Plan document calls for compensation method to determine HCE's. Due to change in demographics, the 2008 401(a)(4) test will produce non favorable results--compared to prior years. Amending the plan in determination year, from compensation method to Top-Paid Group will shift a few HCE's to a non-HCE status benefiting our test results.

I don't see any cut-back issues if the amendment affects only the 401(a)(4) testing. Are there any underline issues that may be challenged by the IRS (i.e. such change in method needs to be done prior to determination year).

Citations to authority is greatly appreciated.

[PensionPro]

The only issue could be the timing of the amendment. As far as I know there is no specific guidance from the IRS. Maybe others have more information on this. You should be okay if you amend during the determination year.

[Blinky the 3-eyed Fish]

Adding participants to a DB plan by definition can't be a cutback. You certainly have until 9.5 months after the plan year-end to make the amendment necessary for nondiscrimination testing. Of course you have 2.5 months after PYE to reflect in funding.

[Guest sui generis]

Adding participants to a DB plan by definition can't be a cutback. You certainly have until 9.5 months after the plan year-end to make the amendment necessary for nondiscrimination testing. Of course you have 2.5 months after PYE to reflect in funding.

I am not sure if I agree or disagree with your opinion regarding the timing of this amendment. It was my understanding the change in HCE determination was considered a voluntary/discretionary amendment, and as such, it needs to be adopted no later than the last days of the plan year for which it applies (Notice 2005-95 III, Notice 2005-66 Section 5(3)). In any event, it seems to me that we are safe to adopt it in the determination year (2008).

My main concern is if am overlooking issues that may be challenged by the IRS. The change in HCE determination seems to be a simple fix -in our case- to avoid additional/significant accruals to existing NHCE's to pass 401(a)(4).

[tymesup]

Does the plan already specify a procedure to follow if 401(a)(4) doesn't pass?

[Mike Preston]

I agree with both the OP and Blinky. Certainly there is no issue with respect to the change in HCE definition, since the net impact is to classify a few previously excluded people as no longer excludable. And at that point in time they are NHCE so it can't be considered discriminatory to add them. That much I agree with Blinky. I also agree that it is a discretionary amendment and therefore needs to be adopted by the end of the year.

And, finally, I agree with the concern that such an amendment still might be discriminatory. Not because of what has been mentioned here, but because of other things that might exist in the document. But I don't think it terribly likely. Just something to ensure isn't hiding under the covers. In fact, I can't even think of anything off the top of my head that a "regular" plan might have which would give rise to this. That doesn't mean that there isn't something weird out there that wouldn't trigger it, somehow. Just gotta check, that's all.

[Blinky the 3-eyed Fish]

I was focusing on the amendment to add NHCE participants to the plan which certainly can be done within 9.5 after PYE. Of course the amendment is too changing the HCE definition, so I agree because of that change, by year-end is needed.