Frequent Plan Amendments

[richard]

We've all heard that the IRS would object to a plan sponsor changing the plan formula each year. What cite can they use (or have they used)?

How frequent can a plan sponsor change the formula?

Does anyone know of any situations where the IRS objected to frequent plan formula changes, and what was the result?

(Do I want to be a test case? No!)

[Everett Moreland]

The discriminatory plan amendment rules in 1.401(a)(4)-5 apply to changes to the allocation formula.

[Lorraine Dorsa]

Another issue to consider is the basic qualification requirement that benefits be "definitely determinable."

While there is no specific ruling which says how often a benefit formula can be amended without causing the benefit not to be "definitely determinable," the IRS could make a very good case that it is not if the formula is amended each year.

I tell my clients that the formula can be amended only every 2 or 3 years. I also make them get a new determination letter if the plan formula has been amended more than once since the last determination letter.

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[richard]

The 401(a)(4) cite is a good cite. I'd be very uncomfortable (translated, it should be disqualified) if the company had a juicy plan when it had no employees, changed to a weak plan when it hired employees, changed to a juicy plan when it had no employees, etc.

But, if the company had one employee, the owner, and he changes the plan formula depending on his desire to make high or low contributions, I think the IRS's only possible argument is the one Lorraine suggests, that of not being definitely determinable. However, I've never seen the situation where the benefit formula was changed each year.

Lorraine, in your experience where the benefit formula changed every two or three years, did the IRS ever raise the issue in their determination letter review?

[Lorraine Dorsa]

No, I've never had the IRS object when I've submitted a plan with a changed benefit formula for a determination letter(but then again I've never had one with changes each year).

Since the definitely determinable issue is there, it seems worth it to get the letter.

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[Guest grebserf]

Take a look at Reg. 1.411(d)-4, Q&A-1©(1). IRS takes the position that a "pattern of repeated plan amendments" adopting essentially the same amendment can result in treatment of the amendment as a permanent part of the plan.

[SoCalActuary]

One participant plans can use the annual amendment as a defacto profit sharing plan, that changes annual contributions. In DB plans, this can also be done with assumption changes. Money purchase plans that vary rate by more than 15% are subject to criticism, since combined MP & PS plans with no amendments would have at most 15% range yearly.

However, in my experience, there have been more than a handful of plans with annual amendments changing benefits. Rarely, they involve rank & file participants. No IRS auditors have made an issue on these plans. When we were requesting FDL's, the IRS has not pursued the issue. The intent to respond to changing business conditions, such as cyclical profits, is sufficient justification for an amendment. Yearly discrimination by intent (as you addressed) is a "facts & circumstances" issue that could cause problems.