Rescinding Plan Year Change

[Guest Patrick Foley]

Defined benefit plan with a long history of 10/1 - 9/30 plan years was amended before 10/1/08 to transition to a calendar year through a short year 10/1/08 - 12/31/08.

The amendment included language prorating service, compensation, etc. as you might imagine.

Driven by funding considerations, plan sponsor now wants to amend again, before the end of the short year, to run the current plan year out to 9/30/09 -- rescinding the plan year change to avoid a 1/1/09 valuation date.

What unintended consequences might this bring about? Employees who have already met short-year service requirements (250 hours for a year of service) when the amendment is adopted may have an additional year of service. But what other and worse things are lurking out there?

Thanks for your help.

[david rigby]

Proposed IRS Reg. 1.412©(5)-1. IRS approval required for a change in PY. IMHO, they won't approve it.

However, assuming such change is approved, this seems to be a perfect way to confuse participants (who already don't appreciate a DB plan for its real value). If the approval is conditioned on a second short year, rather than rescinding the prior amendment, the result will be faster vesting, more confusion over crediting of hours, confusion over compensation averaging. The participants will like the first, and dislike the other two; the employer will dislike all three.

If this is a TH plan, ouch!

Could be confusion over 404(a)(7), if that applies.