11(g) amendment for standardized prototype

[Doghouse]

A profit sharing plan is on a standardized prototype for 2011. The allocation formula is pro-rata based on compensation.

Is it feasible to make the allocation on a cross-tested basis instead of a pro-rata basis, deliberately failing 401(a)(4), and then do an 11(g) corrective amendment to shore it up on a cross tested basis? I understand why some might think this is possible, but it seems to me that there is an issue of not operating the plan in accordance with the terms of the plan document.

[ETA Consulting LLC]

but it seems to me that there is an issue of not operating the plan in accordance with the terms of the plan document.

"Like" <- That is me pushing the "Like" button

[Bird]

The allocation formula is pro-rata based on compensation.

OK...

Is it feasible to make the allocation on a cross-tested basis instead of a pro-rata basis...?

No. The formula tells you how to allocate the contribution, and it can't be changed after participants have earned the right to share in it, generally after earning 501 hours of service in a standardized plan.

[Kevin C]

I see several problems.

1. Standardized prototypes are required to use 401(a)(4) safe harbor allocation methods. That means no cross testing.

2. I'm assuming your 2011 year has already ended, so refer to TAM 9735001 addressing 411(d)(6) violations that would be caused by a retroactive formula change made after the end of the plan year.

3. -11(g)(3)(ii) requires that benefits as determined under the prior plan terms not be reduced by the amendment.

4. Even if you could overlay a new comp allocation on top of the existing salary proportional allocation, -11(g)(3)(V)(A) requires that the accruals under the amendment separately satisfy 401(a)(4).

[Doghouse]

I'm interested in any further comments you may have. What is being proposed is to allocate a low (like 1%) contribution on a pro-rata basis, then adopt an 11(g) amendment, for which 401(a)(4) failure is not a prerequisite, outlining the details of an additional contribution which would satisfy 401(a)(4) on a cross tested basis, including gateway, on its own.

Perhaps this is one of those situations where according to a literal reading of the regulations, you can get there. However, I can't think that this is what Treasury intended when they wrote the regulations, and before the sponsor moves forward, I would like to make sure that they are being advised of risks - if there are any.

[BG5150]

Have you contacted the document provider to see what they have to say about it?

[rcline46]

You will instantly make the prototype an individually designed plan, with no reliance. Not a good thing.

As mentioned earlier, you have a failure to follow the document. And the added benefits might be discriminatory on their own.

In my opinion, not a good thing.

[Kevin C]

IMO both of your proposed actions are the same as the situation in TAM 9735001.

http://benefitslink.com/src/irs/tam9735001.html

[SMB]

Have a somewhat similar situation to that already discussed in this thread - with one additional "twist". In my case, the owner wants to retroactively amend to a cross-tested class allocation for its Profit Sharing Plan for the 2011 plan year, so that he does not receive a contribution - but he wants to make one for his eligible employees (on extension, no $s contributed yet for 2011).

However, based on the TAM that Kevin was so kind to provide the link to, it doesn't sound like it matters whether or not the "cutback" would only apply to an HCE.

So, assuming the owner is adamant about his receiving no contribution for 2011, looks to me like the only option is to make no contribution for the 2011 plan year.

To further complicate matters, under this employer's poorly drafted prototype plan, there is NO service requirement to be eligible to receive an allocation of an employer contribution. So, participants have already accrued the right to have any 2012 employer contribution allocated under the current Plan terms. So, my proposal for 2012 will be to terminate the original PS Plan and establish a new plan with a cross-tested allocation.

Any thoughts, insights or better idea(s)?

Thanks!

[Kevin C]

I think they are too late for 2011, but they could do something for 2012. Since you said Profit Sharing Plan, I'm assuming no 401(k) component. To get a contribution for only the NHCE for 2012, how about restating the PS plan as a 401(k) and including the ability to do a pro-rata QNEC for the NHCEs? You'll want to make sure the document doesn't say an ADP/ACP failure is needed to do a QNEC. A 401(k) might work better for them than a PS for other reasons, too.

[Doghouse]

OK I am raising this subject again. Standardized prototype had pro-rata allocation method for 2012. 11(g) amendment done in 2013 for 2012. The desired final allocation leaves one of the two owners out of the allocation altogether. I've heard arguments that the way 11(g) is written (i.e. no actual failure required to have a corrective amendment), it opens for the door for this type of scenario, but I am just not comfortable relative to the cutback issue. Nonetheless, i am experiencing pressure to participate in this design.

What would you do?

[12AX7]

It appears you again have the potential issue of failing to follow the terms of the plan document. Perhaps the plan needs to be amended to get closer to desired results of the client. I'm not seeing how this is an 11(g) issue where there is a failure to follow the terms of the plan. The plan should be amended in 2013 before participants have more than 501 hours, assuming safe harbor allocation conditions.

[BG5150]

I don't think it's possible to have a non-safe harbor allocation in a standardized prototype.

Is there?

Doing an "11-g" would probably take it out of prototype status.

[12AX7]

It seems this was all discussed last year in this same thread.

[Bird]

Attempting an -11g amendment definitely takes it out of prototype status, which actually bothers me less than the issue of a prohibited cutback. I (still) say that once someone has 501 hours of service, they have earned the right to an allocation as determined under the plan formula in place at that time.

And, for whatever it is worth, maybe I wasn't paying attention when it was posited that you don't need a testing failure to use an -11g amendment, but I don't see how you can ignore the language from the regs below that talks about the purposes of a permitted amendment. Maybe you don't absolutely, positively have to prove a failure, but I don't see how you can blindly ignore the language below about the scope of an amendment, especially in a standardized prototype scenario (some emphasis added by me). I can begin to understand the argument when you have a plan that might have a testing failure under the allocation formula in place, but not in a situation where you simply cannot have a failure, as in a standardized prototype.

For purposes of satisfying the minimum coverage requirements of section 410(b), the nondiscriminatory amount requirement of §1.401(a)(4)–1(b)(2), or the nondiscriminatory plan amendment requirement of §1.401(a)(4)–1(b)(4), a corrective amendment may retroactively increase accruals or allocations for employees who benefited under the plan during the plan year being corrected, or may grant accruals or allocations to individuals who did not benefit under the plan during the plan year being corrected. In addition, for purposes of satisfying the nondiscriminatory current availability requirement of §1.401(a)(4)–4(b) for benefits, rights, or features, a corrective amendment may make a benefit, right, or feature available to employees to whom it was previously not available.

[Doghouse]

The reason I posted it again is because of threads like this one: http://benefitslink.com/boards/index.php?/topic/50781-cross-testing-again/

No one in my particular situation seems to be overly concerned about the loss of prototype status. My concern is, at what point does this become abusive? You could play this game where you allocate something very small, like 1/2 % of pay, pro-rata, and then adopt an 11(g) amendment adding cross-testing, since no failure was necessary to get there. I think this is all in accordance with the letter of the law, but is it in accordance with the spirit... and does that even matter?

Dog

[BG5150]

Well, you don't add an amendment cross testing the plan.

An 11-g amendment is to change the allocation conditions slightly in order to avoid a 401 or 410 failure. The correction still has to fit into the plan details.

I think if the plan doc calls for a safe harbor discretionary allocation (such as pro rata), you could never do an 11-g amendment, because you'd never come to a point where failure COULD occur.

[Bird]

I think it is a different issue with a standardized prototype and ultimately it is a cutback.

I see/remember now about the IRS confirming that you don't have to have a testing failure, but in this scenario it is just too much for my blood.

Also, if I'm not mistaken, contributions made under an -11g amendment are deductible in the year deposited. I don't know if I can prove it but I didn't make it up. That pretty much blows this up.

[John Feldt ERPA CPC QPA]

Not exactly your scenario, but a similar argument perhaps:

Suppose the employer is a PC, not subject to PBGC, and is adding a DB plan on 12/31/2012 and they combo-test it with the DC plan which is in a standardized PT document with a pro-rata PS allocation. They are subject to 404(a)(7), so they hope to only allocate 3% to the HCEs and 7.2% to the NHCEs.

Initially, they contribute and allocate 3% of pay for all participants as the nonelective (pro-rata). They now run 401(a)(4) for the combined plans and it fails (we knew that would happen). The DC plan is now amended using -11(g) by adopting a vol sub document with "each in their own class" retroactively effective for the prior year. Now, to pass 401(a)(4), only the NHCEs receive additional PS allocations.

Is all well under this scenario?

[Doghouse]

John, the situation is fairly similar. But in my case, the desire is to give one of the participants (albeit an HCE and key) a zero. That's the part that gives me cutback concerns. Of course you could argue to make a very small allocation on a pro-rata basis and then the -11(g) amendment to make the bulk of the contribution on a general tested basis, which wouldn't really be substantially different from what you describe. I don't know, maybe it's all good. It just doesn't feel as right as I wish it did.

[Kevin C]

From a discussion with Mike Preston in a thread a couple of years ago, I understood that what you are trying to do required certain language in the document. It might be more accurate to say it requires a lack of certain language in the document. You had to have a document that provided for an allocation method that was not required to satisfy 401(a)(4). I tried to search for it, but it isn't cooperating right now.

When you start from a standardized prototype, I don't think you can get there from here.

1. Per PLR 9735001 once you pass the end of the year, the right to have that year's contribution allocated under the existing formula is protected by 411(d)(6).

2. -11(g)(3)(ii) requires that the amendment not reduce accrued benefits.

3. -11(g)(3)(v)(A) requires that the amendment satisfy 401(a)(4) and 410(b) on it's own.

For Doghouse, I think your plan doesn't work because of 2. and if you are also trying to increase the other owner's contribution over what the original formula provides, because of 3. I wasn't concerned last year about the plan losing its standardized prototype status because if you did what you wanted to do, prototype status would have been the least of your worries.

[BG5150]

Quick aside: if an 11-g type amendment was done for, say 2011, and the plan was taken out of prototype status. Would it get back that status for 2012 since the amendment is no longer effective?

[Doghouse]

Thanks Kevin. As I've mentioned, with discretionary contributions, your #2 and #3 are more of an art than a science. If you do run across the prior thread with Mike P., it would be very helpful.

BG, don't know the answer to your question. My situations are all permanent switches to cross testing, one person per group, and the -11(g) amendment is just a transition thing.

Dog

[Kevin C]

http://benefitslink.com/boards/index.php?/topic/42002-11g-amendments/?p=181165

Found it. The part I mentioned is starts with post #22.

Time flies. It was from 2009.

[Doghouse]

Thank you, kevin. Interesting thread. Our document has the same language you quoted relative to 401(a)(4). The crazy thing is, it's under the "New Comparability Allocation" section - and my plan has a pro-rata allocation formula, so I don't see that this section would have been "activated". I think we use the same document provider.

[Bird]

Following up on my comment above, what do others think about the deductibility of contributions made under an -11(g) amendment? As I said, I thought they were not deductible for the prior year. Yesterday, Sungard had a technical update that says they are deductible:

Is the 11(g) retroactive corrective amendment effective for other requirements?

Yes. The amendment is taken into account for the permitted disparity requirements, the deduction rules and the minimum funding requirements.

But the regs say (my emphasis):

(5) Effect under other statutory requirements. A corrective amendment under this paragraph (g) is treated as if it were adopted and effective as of the first day of the plan year only for the specific purposes described in this paragraph (g). Thus, for example, the

corrective amendment is taken into account not only for purposes of sections 401(a)(4) and 410(b), but also for purposes of determining whether the plan satisfies sections 401(l). By contrast, the amendment is not given retroactive effect for purposes of section 404 (deductions for employer contributions) or section 412 (minimum funding standards), unless otherwise provided for in rules applicable to those sections.

I'm not sure if there is an "otherwise provided for" rule but that sure seems to say they are not deductible in the prior year.

[Belgarath]

Bird - maybe what they meant was that it is effective for deduction rules in that the additional contribution is deductible for the year in which made? I guess you'd have to ask them.