Plan Amendments after the Plan Year

[Guest Marjorie Rogers]

A Plan has just discovered that its employer contributions to the Plan for the 1998 Plan Year will exceed 15% and that the excess will not be deductible under 404(a). The Employer is willing to retroactively amend the Plan to eliminate the one year of service and last day requirement and make the 5% profit sharing contributions for the new participants. Does anyone see any problem with making these amendments in 1999.

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Marjorie A. Rogers

Sutin, Thayer & Browne

Albuquerque, New Mexico

mar@sutinfirm.com

[Guest Harry O]

What about the good, old fashion issue of whether your "additional" contribution will satisfy the section 404 deduction standards?

Contributions are deductible in the year paid (with the 404(a)(6) grace period) provided the contribution is "otherwise" deductible under the IRC. One of the fundamental deduction rules for an accrual taxpayer is that a payment is only deductible if the liability is fixed and determinable at year-end.

In this case, there will be a retroactive amendment to the plan to increase "liabilities" after year-end. At year end, there was no obligation to make contributions for new employees or participants leaving before the end of the year. Now there is. Does this preclude the deduction because there was no obligation for these folks at year end?

Don't know the answer and more facts could be useful (e.g., is this a "formula" PSP) but it would make an interesting research project!

[Guest HIPAAdrome]

Yes. Code Section 411(d)(6) prohibits amendments that take away accrued benefits. If a participant has already satisified the conditions required to receive an allocation, the plan sponsor cannot retroactively change those conditions and take away the allocation.

[M R Bernardin]

In my mind, this is a sort of murky area. There are only two provisions in the Internal Revenue Code which seem to expressly permit a plan to be amended after the close of a plan year. Those provisions are as follows:

1. Code Section 412©(8), which allows an amendment adopted within 2-1/2 months after the close of a plan year to be treated as though it were adopted during the plan year, if certain conditions are satisfied. But I believe that this rule is relevant only for purposes of Section 412's minimum funding requirements (which would not be applicable to most defined contribution plans). In order to use this rule, the plan administrator must notify the Department of Labor of its use, IF the amendment results in the reduction of accrued benefits, by attaching a statement to the plan's 5500 or, if the 5500 was filed before the amendment, by attaching a statement to a copy of the 5500 which was filed and mailing it to the DOL by the due date for the 5500.

2. Code Section 401(a)(4), which allows a "corrective amendment" adopted within 10-1/2 months after the close of a plan year to be treated as though it were effective on the first day of the prior plan year, but only for purposes of 401(a)(4) and 410(B). This type of corrective amendment is specifically not to be given retroactive effect for purposes of 404 or 412, unless otherwise permitted by those sections.

There are no other provisions of which I am aware that specifically address the ability to adopt a retroactive amendment. But, on the other hand, there is also nothing that specifically precludes the ability to adopt a retroactive amendment. Of course, if retroactive amendments are permissible, they could not violate the Code Section 411(d)(6) anti-cutback rules.

The bottom line is that some people believe you can always retroactively amend a plan to increase benefits. I think I would count myself in that camp, too. However, the ability to retroactively amend does not mean that increases the employer's deduction amount. In fact, I think it doesn't unless you decide you come within 412©(8).

I assume that if the employer adopts this amendment, it would be equally applicable to all employees who terminated in the prior year, and that you have otherwise determined that the timing of the amendment would not be discriminatory.

One final thought: it wouldn't hurt to consider filing for a letter on the amendment to reassure yourself that it is okay. If the IRS had a problem with it, you would likely be given the opportunity to cure it.

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[MWeddell]

HIPAAdrome is probably right, although it does depend on how the plan document is worded. Occasionally, we see profit sharing plans drafted to see "the annual contributions shall be 5% of pay, unless the employer declares a different amount shall be paid" so that broadening the group who receive the 5% of pay contribution after they've satisfied the conditions for the allocation isn't a problem. However, in the more typical situation where a discretionary amount is contributed and the plan just states how its allocated, amending the plan now for the 1998 allocation would violate 411(d)(6).

[M R Bernardin]

There is a ruling that ERISA did away with the need for the liability to be fixed and determinable at year-end. Wish I could provide the cite, but I have come across it before. I don't see how this violates 411(d)(6) if you're increasing the groups to receive the contribution, as long as the amount of the contribution itself is discretionary.

[Guest HIPAAdrome]

Well, I should have read the question closer. I thought you were wanting to add an end of the plan year and one year of service requirement, not take it away. In that case, I pretty much agree with M.R. (who I think I knew in a former life -- how's FL?) Sorry about that.

[Guest Harry O]

M R Bernardin -

There certainly was a pre-ERISA ruling that the all events test didn't apply to qualified plans. (74-468). There is really nothing post-ERISA on point. But the better argument is that ERISA did not change the pre-ERISA law in this area.

However, the 1984 changes to the deduction timing rules muddied the waters substantially. Section 404(a) was amended to require that contributions be otherwise deductible "under this chapter." This would include the section 461 all-events test requirements. Moreover, Rev. Rul. 90-105 (concerning accelerated deductions for 401(k) contributions for post-year end services) states that the all events test *does* apply for 404 purposes.

In short, I think the answer is not clear . . .

[M R Bernardin]

Harry O: I think I was thinking of Rev. Rul 76-28. I know there is some controversy on this point, but had always thought that was generally with respect to employers trying to deduct, for a given tax year, deferrals and match made after the end of and with respect to compensation earned after the end of, that tax year, rather than with respect to a straight p/s contribution.

[Guest ESOPwizard]

Misc. comments:

1. I don't regard Rev Rul 90-105 to be well reasoned (for example, it directly contradicts IRC 404(a)(3);

so. I wouldn't let that get in the way.

2. It isn't clear to me whether this amendment would let new people into the plan or merely let

current participants (who would otherwise be ineligible to share in the allocation) now share in the allocation.

If a participant is eligible to make 401(k) contributions but not share in a profit-sharing allocation, I don't

know why his comp doesn't count for 404 purposes already.

3. I'm under the impression (but can't point to anything at the moment)that the IRS would take the position that

the allocation formula must be fixed and determinable at the end of the year. The counter argument is that there

is no profit-sharing contribution until the board approves the contribution and the board can change the allocation

up to the time that it approves the contribution. If the board has already approved a specific contribution, I

believe that it is too late to amend the allocation formula. However, Harry has a good point that standard plan

permits a refund of nondeductible contributions. I don't lnow why the board couldn't approve a second contribution.

[Guest Marjorie Rogers]

I appreciate all the comments. I probably concur that under the all events test of Section 461 that if a retroactive amendment is done in 1999, the Employer could not take a deduction for 1998 and thus the additional contribution would not be deductible under Section 404(a). The employer had declared in 1998 a profit sharing contribution for all plan participants. We were thinking of amending the plan in 1999 to eliminate the one year of service requirement for the profit sharing portion of the Plan.

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Marjorie A. Rogers

Sutin, Thayer & Browne

Albuquerque, New Mexico

mar@sutinfirm.com