Amending PSP for Cross-testing Provision

[chris]

Currently have a volume submitter PSP which is integrated with Soc. Sec. Want to amend PSP to allow for allocations based on classification of employee, e.g., Class A = participants who are physicians and shareholders, Class B = participants who are physicians and non-shareholders, Class C = participants who are neither physicians nor shareholders, ..... The percentage allocated among the participants in each class will be determined depending on cross-testing towards the end of the plan year. Is all that's necessary is to amend the allocation provisions of the PSP document before the end of the current plan year?????

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[Larry M]

It depends.

If your current plan provides an allocation for those who have at least 500 hours or 1000 hours of service during the plan year, you will have to amend the plan for class allocations prior to the expiration of the 500 or 1000 hours. Otherwise, the allocation will be on the old basis.

If you have passed the hour deadline and still want to have a cross tested plan, adopt a new plan with the class allocation before the year end. Do not terminate the old plan (uless you do not mind 100% vesting. Instead, merge the old plan into the new one early next year.

[chris]

The plan has an employed on the last day of the plan year requirement. Wouldn't this requirement allow for the amendment of the allocation formula regardless of the number of hours?? The plan has a 1,000 hour requirement.

[Larry M]

[ignore the following - I am in error:]

If the plan says anyone who is employed at the end of the year and who has had 1000 hours of service during the year is entitled to an allocation based upon the integrated formula in effect (when he/she reached the 1000 hours), then those people currently employed who remain to the end of the year are entitled to that allocation IF a contribution is made.

So, it appears as if you may be too late (assuming a calendar year plan) to change the allocation formula within this plan.

[This message has been edited by Larry M (edited 06-09-99).]

[chris]

Would the same argument apply (i.e., cannot amend to change the allocation formula) if today were the first day of the plan year and the plan had a 1,000 hours and last day of the plan year requirement? In other words, one could say that you could not amend such a plan for cross-testing because an e/ee might work 1,000 hours and might be employed on the last day of the plan year.

If the plan did not have a last day of the plan year requirement, then I would agree that it could not be amended for cross-testing. Satisfaction of the 1,000 hours requirement would entitle a participant to a benefit under the old allocation formula under a 411(d)(6) protected benefit analysis. It just seems that the last day of the plan year requirement would allow such an amendment.

Can you point me to any cites to the Code, Regs., Rev. Rul.'s, PLR's, etc. that might address this?

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[This message has been edited by chris (edited 06-05-99).]

[Guest LJS]

It has been our understanding that you can amend the contribution formula up until the point when a participant is entitled to a benefit. Thus, if the plan has a last day requirement, then you could amend the plan up until the last day of the plan year.

[Larry M]

OOPs!

[sometimes I shoot the gun before taking it out of the holster and end up shooting myself in the foot.]

Yes, subject, of course, to passing 410(B) and 401(a)(4), you can amend theplan prior to the year end if employment at year end is a requirement.