-11(g) Amendment

[austin3515]

How iffy is it (if at all) to amend a plan to bring in a term, or someone who worked less than 1,000 hours, just because they would help testing. So a plan would have to give 8% of pay to the staff to be able to get the owners to the max, but if they amended the plan to bring in this one last person who happens to be 25, they only have to give 5% of pay to the staff.

I know this was the subject of a q&a, but it just seems aggressive.

Are people using this technique on a regular basis?

[John Feldt ERPA CPC QPA]

If the employer allocates 5% to the NHCEs who are eligible now and that allocation causes the plan fail 401(a)(4), then that's exactly one of the reasons 1.401(a)(4)-11(g) exists in the first place - to fix that failure. This does not look too aggressive to me considering the facts you've described.

On the other hand, if the employer writes the plan to exclude all NHCEs from a PS plan, then after the year ends, adopts a -11(g) amendment with 20-20 hindsight to bring in only exactly the lowest cost NHCEs required in order to pass, then your on your own, I think that is too aggressive.

[frizzyguy]

I agree with J4FKBC. If you bring in a term, make sure they aren't 0% vested. That might get you in trouble.

[austin3515]

Does your answer change if everyone is in their own group, and I bump the employee affected by the 11g amendment up to 10% and leave everyone else at 5%?

[austin3515]

And a follow up question. I read the 11(g) regs to specify that these amendments cannot be part of a pattern of making these types of changes, but it appears that this caveat only applies to correcting BR&F issues. Have I got that right?

What I'm getting at is, should we be looking at this option in the same we way we look at net comp testing, or testing based on Otherwise Excludables? i.e., just another tool in the shed to be used when it works, conceivably every year in differnt ways?

[John Feldt ERPA CPC QPA]

Does your answer change if everyone is in their own group, and I bump the employee affected by the 11g amendment up to 10% and leave everyone else at 5%?

No. A carefully worded amendment done after the end of the plan year can target specifically any NHCE(s) to give them the amount needed for the plan to pass testing.

[movedon]

I remember this issue being discussed here a few years ago, and I was in the minority then that thought the whole thing was too fishy. My theory is that the purpose of an 11(g) amendment is to cause a plan to pass testing where the plan cannot pass testing without an amendment. If the plan can pass testing as-is simply by giving a greater contribution to NHCEs, then the amendment is impermissable. That was (and still is) my opinion, not the prevailing opinion, and it's just theory - given the safety in numbers and the opinion of industry leaders (I think Sal discusses the issue in the EOB), I generally lay the issue out for clients and let them decide. Usually they go for it. I'd be interested to see anything from the IRS on the subject. You say there is a Q&A, austin?

[austin3515]

See the last question on page 5 of the attached.

Q_A___2010.pdf

[movedon]

That's interesting. They seem to go along with the idea, but then they also seem to fundamentally not understand something about the question when they say that either approach would require an 11(g) amendment. Giving a greater allocation to the NHCEs does not require an amendment if this is all happening timely during the normal year end valuation/contribution calc/testing procedure. They seem to be assuming that the calc and contribution and valuation were all done and that the failure was subsequently discovered.

My issue remains - assuming the tests can pass without an 11(g) amendment, is an 11(g) amendment appropriate? Can you do an 11(g) amendment without a failure? Or can you fail intentionally only to turn around and do an 11(g) amendment? Seems like silliness to me. Am I the only one?

[austin3515]

I had not picked up on that subtlety actually. You're right, they seem to be udner the assumption that the diocument requires 5% for the staff, and therefore an amendment is needed to increase from 5 to 6. So now when choosing between increasing from 5 to 6, or adding additional eligibles, that of course is a "normal" -11g amendment.

So that does make it different than a plan that includes a discretionary contriobution feature.

[chc93]

That's interesting. They seem to go along with the idea, but then they also seem to fundamentally not understand something about the question when they say that either approach would require an 11(g) amendment. Giving a greater allocation to the NHCEs does not require an amendment if this is all happening timely during the normal year end valuation/contribution calc/testing procedure. They seem to be assuming that the calc and contribution and valuation were all done and that the failure was subsequently discovered.

My issue remains - assuming the tests can pass without an 11(g) amendment, is an 11(g) amendment appropriate? Can you do an 11(g) amendment without a failure? Or can you fail intentionally only to turn around and do an 11(g) amendment? Seems like silliness to me. Am I the only one?

That was my question also. Check out the thread in this link which is discussing this exact issue, especially Mike Preston's posts.

http://benefitslink.com/boards/index.php?showtopic=50781

[austin3515]

I had not picked up on that subtlety actually. You're right, they seem to be udner the assumption that the diocument requires 5% for the staff, and therefore an amendment is needed to increase from 5 to 6. So now when choosing between increasing from 5 to 6, or adding additional eligibles, that of course is a "normal" -11g amendment.

Upon further review the question very clearly references a "discretionary" contribution.

Thanks for the link to that older post. Very informative!

[ESOP Guy]

What I'm getting at is, should we be looking at this option in the same we way we look at net comp testing, or testing based on Otherwise Excludables? i.e., just another tool in the shed to be used when it works, conceivably every year in differnt ways?

These amendments aren't my strongest area of knowledge, but I thought there was a min. amount of time you had to keep the provision in place if you did this. If so, that would tend to make it a little more difficult to use every year wouldn't it?

[movedon]

That was my question also. Check out the thread in this link which is discussing this exact issue, especially Mike Preston's posts.

http://benefitslink.com/boards/index.php?showtopic=50781

Thanks for the link chc93. I missed that thread. Frankly, I find all the evidence unsatisfying (ambiguous preambles, examples in proposed regs that didn't make it into the final regs, oral comments made by IRS reps twenty years ago), but then I am pretty hardheaded. How is there a "correction period" in the first place if there is no failure? Whatever, if it benefits my client, I'll go for it - but I'll probably always mutter something about how the IRS might possibly challenge it, maybe, if they have any sense. They don't.