404 and plan amendment affecting HCEs

[AndyH]

For purposes of the funding cushion under 404, we must ignore benefit increases to HCEs resulting from plan amendments adopted or effective during the previous two years.

Is an automatic indexing of 415 or 401(a)(17) considered an amendment within this context?

[SoCalActuary]

Jim Holland said so, repeatedly.

This position is of course impossible for practical plan administration, because it forces you to look at the plan benefits based on the document provisions and limits as they would have been before the start of the second prior plan year.

But, the IRS regulators don't actually care.

[rcline46]

Jim Holland is no longer at the IRS. His infamous 10 year phase in of benefit increases went away and , imnsho, so will this. It is impossible to determine and calculate (or at least extremely difficult) and so likely to be ignored by (many, most, all - pick your answer).

I do not think it is in any regulation or notice that can be pointed to with authority.

[AndyH]

I've heard JH say it also, and I know he's history, so I was wondering what the conventional wisdom is now.

But does anybody remember what his rationale even was? I don't recall a cite.

[Blinky the 3-eyed Fish]

I never did understand his rationale and haven't ever considered it in my calculatons. Sure COLA increases were amendment bases under the old unit credit method, but actual amendments? I think not.

[david rigby]

I never did understand his rationale ...

I heard it at 2008 (09?) EA meeting. The rationale was not explicitly stated, but it was not difficult to read between the lines that he (and/or someone else at the IRS) wanted to keep the 404 upper limit as low as possible. The "rationale" was definitely related to tax revenue.

[Calavera]

We decided to incorporate it in our calculations. It reduces the maximum deductible contributions but avoids a possibility of the IRS claiming excise taxes on the non-deductible contribution.

The 2008 Gray Book QA21 discusses impact of these "amendments" on 436 restrictions if the AFTAP goes below 80% as the result of limit increases. As 2008 EA report stated: "Question 21 is a frightening question, with a frightening answer."

http://www.actuary.org/ear/pdf/summer_2008.pdf

Interesting to point out the QA3 from 2002 Gray Book:

QUESTION 3

Funding: Limit on Deductible Contribution to Unfunded Current Liability

EGTRRA extends the IRC 404(a)(1)(D) "Unfunded Current Liability" deduction to multiemployer plans and to plans that cover 100 or fewer participants. However, for plans covering 100 or fewer participants, unfunded current liability shall not include liabilities attributable to benefit increases to highly compensated employees from amendments made or effective (whichever is later) within the last 2 years.

1) When does the "last two years" begin?

2) Is a plan year of less than 12 months a "year" for "last two years" purposes?

3) Does the prohibition on reflecting recent amendments apply to multiemployer plans that cover 100 or fewer participants?

4) For this purpose, is the date on which a plan amendment is formally adopted the date it is “made”, or may an earlier date be considered the date an amendment is made if the plan is operated consistent with the amendment for amendments that reflect changes in the law or annual updates of IRC limits?

5) If an amendment is adopted under IRC 412©(8), is the date on which it is "made" deemed to be the start of the plan year for which it is treated as effective for IRC 412 purposes?

RESPONSE

1) Two years prior to the beginning of the plan year for which current liability is determined.

2) No, a short plan year is not a year for this purpose.

3) Yes.

4) An amendment is made on the date it is formally adopted. Annual cost of living increases in statutory limits such as those in IRC §§401(a)(17) and 415(b) are not considered "amendments" for this purpose. No guidance was given as to whether changes made at the time of EGTRRA compliance would be considered "amendments" for this purpose.

5) No, for this purpose, the date the amendment is made is the date as of which the amendment is adopted.