Deadline for making top paid group election

[Guest Dash02]

Can someone please tell me the deadline for making a top paid group election under 414(q) (1)(B)(ii) in order to be effective for the testing year of calendar 2010?

I have a Newsletter which claims that the PPA established a set deadline for making the election. The Newsletter says that the election must be made "by the end of the plan year." I am unclear as to which plan year the Newsletter is referring to ... the testing year (2010), or the preceding "lookback" year (2009).

I was unable to find the relevant provision in the PPA. Can anyone provide me a citation?

Thanks for your help!

[Tom Poje]

This is similar to 'how late can a plan switch testing method (current vs prior)

The answer provided by the IRS at the ASPPA conference 2009 #13

was as follows:

This is a discretionary amendment as defined in Rev. Proc. 2007-44, which generally

must be adopted by the last day of the plan year to which it applies. However, it is

possible an earlier deadline might apply to avoid violating the anti-cutback rules of IRC

§411(d)(6). See also, Treas. Reg. §1.401(k)-1(e)(7), which makes the testing method

a plan document requirement.

based on that, I would hold you have until 12/31/2010 for a plan year ending 12/31/2010. (otherwise the caveat they added about anti cutback makes little sense.. for instance, suppose this was a cross tested plan, and one of the groups was HCEs. then any change to that group could result in a cut back if it changed who was an hce.

[Bird]

I think the relevance of the caveat in this case is that an employee could accrue rights to a QNEC contribution, if made, prior to 12/31. If your QNEC allocation has no service requirement, then an employee who is an NHCE as of 1/1 under the terms of the plan at that moment has accrued rights to a QNEC allocation on 1/1, and changing that employee to an HCE by virtue of an amendment making the top paid group election is a prohibited cutback. Honestly, I have a hard time arguing against that.

Likewise, if your QNEC has a 501 hour requirement, then you could amend until someone has 501 hours. If the QNEC has a last day provision, then you could amend up until the last day of the year.

[Guest Dash02]

First off, thank you both for your replies.

I am concerned, however, that the deadline occurs during the preceding lookback year (2009) rather than the testing year. The statutory language of 414(q)(1)(B)(ii) is the source of my concern, which provides:

(q) Highly compensated employee

(1) In general

The term “highly compensated employee” means any employee who—

(A) was a 5-percent owner at any time during the year or the preceding year, or

(B) for the preceding year—

(i) had compensation from the employer in excess of $80,000, and

(ii) if the employer elects the application of this clause for such preceding year, was in the top-paid group of employees for such preceding year.

Thus, the election must be made "for such preceding year." This concerns me in that this language at least arguably supports the conclusion that that such election must be made during this preceding lookback year.

The statutory language permitting the use of current year ADP testing (401(k)(3)(A) flush language) is different ... and less troubling. It merely provides:

An arrangement may apply clause (ii) by using the plan year rather than the preceding plan year if the employer so elects, except that if such an election is made, it may not be changed except as provided by the Secretary.

What do you think? It's ok if you think I'm nuts ... I'd like to be convinced that I'm wrong on this one!

Does anyone know whether PPA addresses this issue as claimed in the Newsletter I came across?

[Bird]

The "for such preceding year" language doesn't bother me; I think it's just referring to the fact that that's the year you're looking at.

I don't remember PPA saying anything about this.

(And I don't think you're crazy.)