Correction of compensation defintion

[Guest kdhaan]

Our client is on a fiscal year which ends on September 30 and which also corresponds to the year end for their defined contribution plan. The plan defines compensation as "all amounts paid during the plan year." However, in practice, they have included bonuses which accrued during the plan year but which are not being paid until after the plan year. We would like to amend the plan document to reflect what is being done in practice, but I was told that accruals not paid until after the end of the plan year cannot be included in the compensation definition for allocation purposes. Is there any reason that the amendment can't be made?

[Guest njwhite]

The general rule is that "discretionary" amendments (other than those that qualify under certain remedial amendment periods provided for by the IRS) must be adopted in the plan year in which they become effective. Therefore, you cannot RETROACTIVELY amend the plan to include bonuses which accrued in prior plan years (absent approval by the IRS under Walk-in CAP --- see below). Of course, you could amend the plan presently to include the bonuses on a going forward basis.

You should be aware that operating a plan in a manner which is contrary to its terms (i.e., including bonuses in compensation when the plan's definition of compensation does not provide for the inclusion of such amounts) results in a qualification failure. If the IRS audits a plan and discovers a qualification failure, it could disqualify the plan, resulting in immediate and drastic tax consequences to the plan sponsor and the plan's participants.

Accordingly, I recommend that you consult competent ERISA counsel regarding this matter. Such consultation should include a discussion of the various voluntary IRS remedial correction programs, and specifically the Walk-in Closing Agreement Program, under which you may be able to retroactively amend the plan in the manner you desire. Please see the discussion on this message board under the topic "Ability to reform the plan document in Walk-in CAP."