Discretionary PS Funded Year Round

[austin3515]

Anyone had a situatiuon where a client (a non-profit in this case) funds their "profit sharing" each pay-period in a 401(k) plan, but would like to change the rate mid-year? There are no allocation conditions.

My concern is that everything in the document about allocating profit sharing uses annual language. I'm on the EGTRRA Corbel Prototype (I know, I know, we're getting the VS for PPA--so we can make amendments and then argue that they were indeed minor).

If anyone has thoughts or can suggest a workaround I would appreciate it. For example, would a board resolution do it?

[Belgarath]

Well, perhaps you can amend and restate into the VS now, instead of waiting?

But as to "minor modifications" - I posted a question on this a while back - see below - no replies. I hope someone brings this up at the ASPPA conference or some similar forum - I'd love to hear what the IRS reps think about this.

In the past, it seemed that the IRS was fairly reasonable about allowing MINOR modifications to a VS without requiring a determination letter filing. However, under Revenue Procedure 2011-49, a literal reading of the Revenue Procedure doesn’t provide any wiggle room on this subject. In fact, they specifically removed a provision from prior Revenue Procedures that, reasonably, allowed correction of “obvious and unambiguous” typographical errors and/or cross-references. Now, if you lose reliance over fixing a typo, or a reference to the top-heavy provisions in article “x” – when in fact article “x” is for minimum distributions and article “b” is the top-heavy article, then more substantive modifications seem risky.

Anyone had any conversations with the IRS on this whole issue, or heard anything at conferences, etc.? Whether the IRS truly intends to enforce this I can’t say.

But it looks like you could file minor modifications on a 5307, as per the following.

See following excerpt from Revenue Procedure 2012-6.

Modifications to Revenue Procedure 2011-49

.02 Rev. Proc. 2011-49 is hereby modified as follows with respect to determination letter applications filed on or after May 1, 2012:

1. An adopting employer of an M&P plan (whether standardized or nonstandardized) may not apply for a determination letter for the plan on Form 5307.

2. An adopting employer of a VS plan may not apply for a determination letter for the plan on Form 5307 unless the employer has modified the terms of the approved plan and the modifications are not so extensive as to cause the plan to be treated as an individually designed plan.

[Bird]

Anyone had a situatiuon where a client (a non-profit in this case) funds their "profit sharing" each pay-period in a 401(k) plan, but would like to change the rate mid-year? There are no allocation conditions.

My concern is that everything in the document about allocating profit sharing uses annual language. I'm on the EGTRRA Corbel Prototype (I know, I know, we're getting the VS for PPA--so we can make amendments and then argue that they were indeed minor).

If anyone has thoughts or can suggest a workaround I would appreciate it. For example, would a board resolution do it?

So they have been contributing X% per pay period and now want to contribute Y% for the remaining pay periods? But the plan allocation language is annual, and you want to change the language to per pay period? I'd be more worried about whether it can be done at all than with how to do it; I see it as a prohibited cutback. I'd have them contribute at the lower rate, then figure out the highest percentage anyone got and true up at the end of the year.

[austin3515]

I'd be more worried about whether it can be done at all than with how to do it; I see it as a prohibited cutback

The thought crossed my mind, but I just have a hard time believing that based on the relevant facts and circumstances it could be construed by a rationale individual as a cut-back. Just an opinion I know, and will stipulate that a literal interpreation probably supports your conclusion.

The employer is going out of their way to provide this generous benefit, every pay-period, it just doesn't seem right to "stick-it-to-em" for being so kind to their employees.

Anyone else have any thoughts?

[BG5150]

Does the document call for a fixed contribution already? Or is it discretionary?

[austin3515]

Discretionary.

[Tom Poje]

A similar question was asked at the ASPPA Conference/

(And again, in addition, there are other possible issues such as, what if plan has a last day rule: now what happens if a person quits)

#33 2009 Conference

A plan provides for a discretionary match which is computed on an

annual basis. All participants share in the match. To avoid a large

contribution at the end of the year, the employer contributes (for

example) a 100% match on deferrals not exceeding 4% of

compensation on a payroll basis throughout the year. Is there a

violation of the timing of contribution regulations if the employer

computes and funds the match this way, and then deposits any

possible match true-up at plan year-end?

Under the final 401(m) regulations, you cannot prefund matches before they are

earned. Therefore, we will assume for purposes of this question that no requirements

apply in regard matching contributions. On that basis, we are concerned that the

allocation violates the terms of the plan, which provides for an annual allocation. With

regard to the true-up, if a true-up is available to anyone who contributes at an irregular

rate during the year (i.e., who contributes in excess of the 4% that is eligible for

matching contributions for some part of the year and contributes below the 4% for the

other portion of the year), but only HCEs qualify, there is no discrimination problem.

However, if NHCEs qualify for this true-up under the plan and are denied the

additional matching contribution, you will have both discriminated in favor of the HCEs

and violated plan terms

[DMcGovern]

Isn't there a difference between how a contribution is allocated/calculated and how (when) it is funded? For instance, in the Corbel document it provides for options on when the match will be funded; in the plan & trust document section 4.2 for time of payment for employer's contribution it says it is up to the sole discretion of the Employer. (It further provides for ADP safe harbor match at least quarterly.)

Wouldn't this permit the Employer to fund throughout the year, with a final determination on the annual allocation at the close of the year with a true-up?

[austin3515]

I'm proposing creating an allcoation period from 1/1/2012 - 8/31/2012, and then another period from 9/1/2012-12/31/2012.

You're answer is of course correct - it's just not what the client wants to do.

Am I being too cavalier with this?

[BG5150]

If it's discretionary and calculated yearly, why can't the ER just adjust future contributions to aim for the funding target? For example, if they were doing 5% and want to do 3%, just put in 1% for a while. Or nothing.

[Kevin C]

I'm proposing creating an allocation period from 1/1/2012 - 8/31/2012, and then another period from 9/1/2012-12/31/2012.

411(d)(6) protects benefits to the extent already accrued and eligibility for a contribution for the year once the requirements are satisfied. As long as you don't change the eligibility for the PS contribution, I don't see a cutback issue with your proposed action. the benefit change will be prospective only. You are talking about a PS contribution, so the prefunding prohibition doesn't apply.

The hard part will probably be fitting it into your prototype document.

[Bird]

411(d)(6) protects benefits to the extent already accrued and eligibility for a contribution for the year once the requirements are satisfied. As long as you don't change the eligibility for the PS contribution, I don't see a cutback issue with your proposed action. the benefit change will be prospective only.

But there are no allocation requirements, so participants have already earned the right to the allocation formula (pro-rata, based on annual comp). And this new method isn't that. Maybe I'm being ultra-conservative, but I would find another way to get close to what they really want.

[Kevin C]

But there are no allocation requirements, so participants have already earned the right to the allocation formula (pro-rata, based on annual comp). And this new method isn't that. Maybe I'm being ultra-conservative, but I would find another way to get close to what they really want.

I disagree that they have already earned the right to receive contributions based on future compensation at the same rate as for past compensation. In your view, would they be able to terminate that plan now? If they have already earned the right to the same rate of contributions for compensation paid for the remainder of the year, terminating the plan mid-year would result in a 411(d)(6) violation.

I do agree that they have earned the right to contributions already allocated and they have earned the right to receive an allocation of whatever PS contributions are made for the remainder of the plan year. They also have the right to receive the contributions the plan document says they get. If I'm missing something in 411(d)(6) or the regs that protects future accruals, please point it out.

Whether it is a good idea or not is another issue. I would also recommend that it be handled another way, if possible.

[Bird]

I disagree that they have already earned the right to receive contributions based on future compensation at the same rate as for past compensation. In your view, would they be able to terminate that plan now? If they have already earned the right to the same rate of contributions for compensation paid for the remainder of the year, terminating the plan mid-year would result in a 411(d)(6) violation.

I do agree that they have earned the right to contributions already allocated and they have earned the right to receive an allocation of whatever PS contributions are made for the remainder of the plan year. They also have the right to receive the contributions the plan document says they get. If I'm missing something in 411(d)(6) or the regs that protects future accruals, please point it out.

Whether it is a good idea or not is another issue. I would also recommend that it be handled another way, if possible.

Well, not to drag it out, but I see the fact that some contributions have been deposited (not allocated) as irrelevant, and think that plan termination as of a date during the year is not the same situation. I rarely if ever think you're wrong so am happy to just agree to disagree (but agree that a better solution is recommended!).