Changing Plan's Eligibility Provisions

[msmith]

A Plan document currently excludes union employees. The employer has decided to change the Plan’s eligible employee definition to include union employees and has already begun submitting 401(k) contributions to the Plan on behalf of the union employees since the beginning of this year (2010). Question: If the Plan is amended no later than the end of this Plan Year (2010) to include union employees as an eligible classification, would this qualify as a timely adopted amendment under the “discretionary amendment” rules or did the amendment need to be in place prior to the employer’s implementation of this change? In other words, does the ECPRS correction method for the early inclusion of ineligible employees only apply if the Plan was not amended by year-end?

[J Simmons]

The amendment needed to be in place before the implementation for this change. You need an EPCRS correction.

[K2retire]

I believe the EPCRS correction is a retroactive amendment to change eligibility that is submitted for a D letter. Do depending on whether you normally submit amendments for D letters, it may not by much of a change from what you proposed.

[austin3515]

This is from the IRS Correction Program, called EPCRS, Section 2.07. I think SCP is avaialble. Doesn't fit perfectly, but boy it sure is close!!

(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment Correction Method. The Operational Failure of including an otherwise eligible employee in the plan who either (i) has not completed the plan’s minimum age or service requirements, or (ii) has completed the plan’s minimum age or service requirements but became a participant in the plan on a date earlier than the applicable plan entry date, may be corrected by using the plan amendment correction method set forth in this paragraph. The plan is amended retroactively to change the eligibility or entry date provisions to provide for the inclusion of the ineligible employee to reflect the plan’s actual operations. The amendment may change the eligibility or entry date provisions with respect to only those ineligible employees that were wrongly included, and only to those ineligible employees, provided (i) the amendment satisfies § 401(a) at the time it is adopted, (ii) the amendment would have satisfied § 401(a) had the amendment been adopted at the earlier time when it is effective, and (iii) the employees affected by the amendment are predominantly nonhighly compensated employees.

(b) Example.

Example 27:

Employer L maintains a § 401(k) plan applicable to all of its employees who have at least six months of service. The plan is a calendar year plan. The plan provides that Employer L will make matching contributions based upon an employee’s salary reduction contributions. In 2007, it is discovered that all four employees who were hired by Employer L in 2006 were permitted to make salary reduction contributions to the plan effective with the first weekly paycheck after they were employed. Three of the four employees are nonhighly compensated. Employer L matched these employees’ salary reduction contributions in accordance with the plan’s matching contribution formula. Employer L calculates the ADP and ACP tests for 2006 (taking into account the salary reduction and matching contributions that were made for these employees) and determines that the tests were satisfied.

Correction:

Employer L corrects the failure under SCP by adopting a plan amendment, effective for employees hired on or after January 1, 2006, to provide that there is no service eligibility requirement under the plan and submitting the amendment to the Service for a determination letter.

[jpod]

Query whether you would have a reasonable basis for taking the position that the plan was effectively amended prior to 1/1/10 by virtue of the execution of a new collective bargaining agreement that provided for the participation by the union employees (of course, that is a fact which I am assuming and it may not be true). If so, you could avoid the determination letter step.

[Guest Sieve]

How can the employer just decide to give benefits to a group of collectively-bargained employees without negotiating with the union or getting their OK before allowing them to defer? Sounds like an unfair labor practice, to me.

The plan's exclusion is probably not for union employees, but is carefully worded (as per IRC Section 410(b)) to exclude union employees covered by a collective-bargaining agreement where retirement benefits were the subject of good-faith bargaining, unless their CBA permits plan participation. So, if the union was consulted and it gave permission to allow its union members to participate in the plan, I would argue that the union's consent is a revision of the CBA, and the Plan, by its current terms, permits these individuals to participate--therefore no document change (or EPCRS) is necessary.

On the other hand, if union consent was not received, then, aside from the labor issues, I don't know if EPCRS (at least the earlier quote) is any help, because it covers individuals who are otherwise going to be eligible--but these union employees are not employees who, with the passeage of time, will eventually come into the plan and therefore are merely added early. Rahter, they are added by fiat, while the plan specifically excludes them (and not just for a period of time).

[Guest wgibson]

Ignoring the obvious collective bargaining issues, this situation could occur with the inclusion of any type of previously excluded employment classifications OR as a result of an employer’s decision to lower the eligibility requirements. Going back to the original question, why does an amendment liberalizing the eligibility provisions, by expanding coverage to an additional group of employees, not qualify as a “discretionary” amendment which is considered as being adopted timely so long as it is adopted by year-end?

Isn't this similiar in nature to the addition of a ROTH 401(k) feature (another type of discretionary amendment)? Employees could make ROTH 401(k) deferrals without the Plan having those provisions if the amendment is adopted prior to year-end. A ROTH 401(k) amendment not adopted by year-end would then need to be a retroactive amendment subject to EPCRS correction methods.

Also, if this was a violation which needed to be cured by retroactive amendment, Q&A 40 from the 2009 ASPPA Conference seems to indicate that an IRS determination letter filing is not required if the retroactive amendment is done within the scope of a pre-approved document.

[Kimberly S]

If the docment does not allow Roth deferrals, they cannot be accepted into the plan. Just like if you have a profit sharing plan with no deferrals, it cannot start accepting deferrals until after the amendment allowing them is signed.

[msmith]

If the docment does not allow Roth deferrals, they cannot be accepted into the plan. Just like if you have a profit sharing plan with no deferrals, it cannot start accepting deferrals until after the amendment allowing them is signed.

Not true - if adding Roth, the amendment must be done by the last day of the first year in which it is used.

[Guest wgibson]

From IRS Notice 2006-44 (Sample Amendment for ROTH):

Time and Manner of Adoption. Plan sponsors who want to provide for designated Roth contributions in their § 401(k) plans must adopt a discretionary amendment as provided in Notice 2005-95, 2005-51 I.R.B. 1172. The deadline to adopt a discretionary amendment is the end of the plan year in which the amendment is effective, as set forth in section 5.05(3) of Rev. Proc. 2005-66.

Back to the original question, if coverage is expanded operationally by the employer and an amendment is adopted by the end of the Plan Year reflecting the operational change, would this qualify as a timely adopted "discretionary" amendment? If not, why?

[Guest Sieve]

This, of course, isn't a Roth question (at least not in the OP), but it's a nice discussion of Roth, nonetheless.

ms -- What does the union exclusion in your plan say? Did the union consent to the addition of CBA employees? As I stated in the middle paragraph of my earlier post, under the right set of circumstances there is no need to make any plan amendment and everything is OK as is (without the need to worry about whether 'tis nobler in the mind to EPCRS or not to EPCRS).

[msmith]

This, of course, isn't a Roth question (at least not in the OP), but it's a nice discussion of Roth, nonetheless.

ms -- What does the union exclusion in your plan say? Did the union consent to the addition of CBA employees? As I stated in the middle paragraph of my earlier post, under the right set of circumstances there is no need to make any plan amendment and everything is OK as is (without the need to worry about whether 'tis nobler in the mind to EPCRS or not to EPCRS).

Sieve - You are correct, this is not a Roth (k) question. Roth(k) was simply used as an example of a discretionary amendment.

The Plan is a Volume Submitter and is using the normal language to exclude union employees (subject to collective bargaining). We are looking into any union consent to the inclusion of union employees.

To get back on topic - let's suppose that the Plan excludes salaried employees and mid-year the Employer allows salaried employees (highly and non highly compensated) to defer to the Plan. Can the Plan be amend by the last day of the Plan Year in question, to include salaried employees as an eligible class? With or without EPCRS?

Thank you!!