Amendments, Amendments, Amendments....

[Guest Frank Jackson]

I have a 401(k) plan that has no profit sharing provision. They would like to add this provsion and make a contribution for the 1998 plan year. Can they do this? Generally speaking how long does a plan have to make retroactive amendments? I usually stick by the 2 1/2 after the end of the plan year rule but some folks say they should have done it by the end of the plan year (in this case 12/31/98) some say they have until they file their company taxes. Other say there are different rules for pension plan vs. profit sharing plans. As usual code section reference would help.

Thanks.

[Guest Arch]

To add a profit sharing feature to the 401(k)plan, the plan would need amended prior to the end of the year in which you wanted to make the profit sharing contribution, namely 1998. The 2 1/2 month rule I believe is the allowable period you can amend a retirement plan to make it satisfy coverage and your nondiscrimination requirements. Anyone else believe this to be true??

[Lynn Campbell]

I agree. The 2 1/2 month period is the deadline for certain retroactive amendments but a change to a 401(k) would need adoption during the Plan Year.

[Guest Harry O]

There always seems to be confusion on when a retroactive plan amendment can be given effect. I think the easiest way to remember what the rules are here is to remember that the federal tax system is based on an annual accounting period. Your deductions, income, etc. are all based on what happened during that annual period. Thus, the tax consequences of your plan depend upon what is *actually* in place on the last day of the annual accounting period -- the last day of the plan year. If your plan doesn't permit profit sharing contributions on that date, then you can't retroactively amend the plan to make such contributions and get a tax deduction.

The only exception to this general rule are those provided by statute or regulation -- e.g., section 401(B) for certain disqualifying provisions, 4975 regulations for retroactive ESOP amendments, 412©(8)for certain retroactive amendments for funding purposes, 401(a)(4) retroactive "corrective" amendments.

Unless one of these exceptions apply, take a picture of your plan on the last day of the plan year . . . this is the document you are stuck with!

[MWeddell]

I disagree with others' conclusions above.

The Code and the regulations establish a lot of specific deadlines for amendments. In addition to the list that Harry O included in his posting, add Reg. 1.401(k)-1(a)(3)(ii), regarding the establishment of a cash or deferred arrangement and IRC 411(d)(6) prohibiting retroactive amendments decreasing a participant's accrued benefits and optional forms of benefit payments, including retroactive changes in contribution allocation formulas.

However, the Code and regulations, as far as I know, never tell us what's the general background rule for whether an amendment may be retroactive in the absence of the application of any of the specific deadlines. My sense is that the Code's and the regulations' silence means that the background rule is "anything goes." In other words, because a retroactive implementation of a profit sharing contribution doesn't violate any of the IRC 401(a) conditions, it's allowed for qualified plans.

As a practical matter, you'll be limited to the 404 deadline in your situation, the date the employer's tax return, including any extensions, is due.

Naturally, it'd be prudent to submit the amendment or restated plan document to the IRS to get a favorable determination letter after the fact.