Standardized Doc - Start a new plan?

[Gilmore]

A 401(k) plan with a pro-rata discretionary profit sharing allocation is written on a standardized prototype document. The document provides for an allocation if the participant is employed on the last day of the year, or earned 500 hours of service.

The employer would like to make a profit sharing contribution, but would like to use a tiered allocation rather than the pro-rata allocation.

I understand that the existing plan cannot be amended if a participant has earned 500 hours.

Is it permissible for the employer to adopt a second profit sharing plan that allows for a tiered allocation and a last day requirement?

If so, would the plans be allowed to merge at some point in the future? It seems to me that starting the second plan circumvents the contribution provisions that would be required under the first plan, especially if the plans were merged, say the next plan year.

Thanks.

[ETA Consulting LLC]

Yes, that is possible. You should ensure the client doesn't become a victim of the 'butterfly effect' when you implement this type of strategy. Legally, it is possible; happens all the time.

Good Luck!

[Gilmore]

Can you elaborate on the "butterfly effect"?

[Gilmore]

I was just speaking with an ERISA attorney who said that while there is no specific rule against adopting a new plan with a different allocation method, in his opinion the IRS could consider this as abusive.

Could this be considered as overly aggressive?

[Bird]

Could this be considered as overly aggressive?

I don't think so. Have done it a few times, and believe me, it's not an original thought of mine. I never thought of it as aggressive, just inefficient and moderately expensive. FWIW we typically merge the plans as of the first day of the following year.

[Gilmore]

Ok, thank you for the responses.

[Guest GeerTom]

IMHO, the base IRS position is just wrong. There is no accrued benefit in a discretionary profit sharing or stock bonus plan until the contribution is determined, so there is no there there to protect from cutbacks.