11-g amendment

[Dougsbpc]

Supposedly, a plan or plans that fail the general test can provide contributions or benefits to current participants or provide contributions or benefits to those who are not yet eligible as long as the contribution or benefit has substance.

I have always been a little uneasy about the order of this.

For example, suppose you are testing a DB and PSP and the PSP has a last day requirement and a current NHCE participant terminates employment 4 days before the plan year end and the plans fail 401(a)4. However, the employer has 4 new employees who have yet to meet the eligibility requirements. If the youngest of the 4 is brought in and given a 10% of salary contribution, the plans easily pass.

With the few of these we have done, we always had some criteria such as the ineligible employee with the most / least hours is chosen, or all those hired before a certain date.

Is it possible to simply cherry pick?

Any comments / agreements / disagreements on this?

[John Feldt ERPA CPC QPA]

Substance generally means that you can't provide an allocation to a nonvested terminee and then forfeit the benefit. Doing that would have no substance.

What you describe doing seems okay to me, including cherry picking NHCEs, unless it goes so far to violate the unapproved unwritten regulations otherwise known as the Carol Gold memo. In that memo, all of the regular full time employees were excluded from the plan and only the very short time people were covered just to get the plan to pass.

The Carol Gold memo indicates that certain words written in the 401(a)(4) regulations about discrimination might have to be ignored, in particular:

"In making this determination, intent is irrelevant. This section sets forth the exclusive rules for determining whether a plan satisfies section 401(a)(4). A plan that complies in form and operation with the rules in this section therefore satisfies section 401(a)(4)."

Basically the memo says that as long as the plan is not primarily designed to benefit mostly short service part-time employees, then you are okay, probably. Otherwise the design is violating "the spirit" of the regulations. Where do the regulations support that idea you ask? Well, although it seems to contradict the quote above from 1.401(a)(4)-1(a) above, here's 1.401(a)(4)-1(c ):

"(2) Interpretation. - The provisions of §§1.401(a)(4)-1 through 1.401(a)(4)-13 must be interpreted in a reasonable manner consistent with the purpose of preventing discrimination in favor of HCEs."

So, although the exclusive rules are spelled out and intent is irrelevant as stated under 1.401(a)(4)-1(a), 1.401(a)(4)-1(c ) says, "but not really."

edit: for clarification