Amend type of profit share contribution mid year

[EBDI]

This plan is a 401k (not a safe harbor). The plan document is being restated in July 2015 and the plan sponsor wants to change from an Integrated profit sharing contribution to a New Comparability contribution effective 1/1/2015. Would this cut back the participant's benefits and rights? I read that the new formula needs to be equal to or better than the original allocation when amending back to the first of the current year. The plan sponsor did not make an employer contribution in the prior year. Would the employees need to receive at least 5.7% since that was the integrated formula?

[Lou S.]

What are the current allocation conditions to receive an employer contribution?

If participants have satisfied those conditions you can't cut them back.

[EBDI]

The current allocation condition is 1000 hours, no last day requirement. So anyone who has worked 1000 hours, can't have a contribution for 2015 below 5.7%, correct?

[Tom Poje]

but let's suppose the contribution for the year is 100,000.

each NHCE would have received 6.3% under the old formula.

now by switching to a new comparability you want to allocate 5.7% to each NHCE and the rest to the owners.

I would think that was a cut back.

[EBDI]

Why would each NHCE receive 6.3% under the old formula? Wouldn't it be 5.7%? None of the NHCE's will exceed the SSTWB.

[K2retire]

Why would each NHCE receive 6.3% under the old formula? Wouldn't it be 5.7%? None of the NHCE's will exceed the SSTWB.

The percentage each participant receives depends on what they decide to allocate for the year. In the example above, it was 6.3%.

If they want to change the formula, they need to make that change effective next year if anyone has already satisfied the 1000 requirement.

[Tom Poje]

lets suppose nothing changes from 2014 to 2015. all comps remain the same.

In 2014 I allocated 100,000 across the board. this turned out to be exactly 5.7% for the NHCEs and again, for the sake of the argument, those making over the taxable wage base received just enough to allocate 5.7% on the excess.

now in 2015 you want to allocate 150,000 but not give any of the additional 50,000 to the nhces, even though they have already accrued a benefit under the old formula. If you didn't change the formula they would have received more

[EBDI]

Would the answer change if there wasn't an employer contribution in the prior year? In this case, they did not make a profit share contribution nor a match in 2014.

[Tom Poje]

if the current plan document says you accrue a benefit after 1000 hours (no last day rule) then the document has told people they are entitled to whatever formula is in place this year - that is my understanding of things. (I am assuming of course since it is past mid July a number of people have indeed worked 1000 hours.

last year's contribution or lack of it has no bearing on anything.

[ESOP Guy]

I think the easiest way to explain this might be this:

You should allocate whatever dollars the company is going to contribute to the plan under the old formula and the new formula.

If the new formula results in someone who has worked 1,000 by the time the amendment was put into place to receive less dollars then under the old formula you have a problem in my mind.

It seems like anyone who has worked a 1,000 hours before the amendment is entitled to an allocation of any dollars put into the plan under the old formula. However, if the new formula were to be better for them the law doesn't have an issue with an increase only a decrease.

Given the point of the change has to be to give less to the rank and file in favor of the higher paid I think you have a problem.

[ESOP Guy]

The possible exception to my comment above would be this.

When I first started working in this business it was a commonly held view that if a plan has a discretionary contribution no one had earned a right to a benefit until the contribution was declared. As such you could amend the formula all you wanted until 12/31.

That argument seems to have fallen out of favor in most people's minds I know.

It seems like the conventional wisdom now says people who have met the allocation requirements have a right to no worse then that allocation method for that year.

[EBDI]

Thanks for all of your helpful responses. I ran the numbers both ways using 2014 comp as an example and of course the NHCE's benefited better under the old formula.

[Tom Poje]

ESOP Guy - again, if plan had a last day provision, then no one has earned a right to anything. perhaps that is what you are thinking of, and that would still hold true, or at least that is what I was always told

[Bird]

You can always start a new plan with the desired formula, and merge one into the other on 1/1/16.

[ESOP Guy]

ESOP Guy - again, if plan had a last day provision, then no one has earned a right to anything. perhaps that is what you are thinking of, and that would still hold true, or at least that is what I was always told

I agree if there is a last day provision the case is stronger (i would say I agree with you but I know a few people who would disagree with us).

[ESOP Guy]

You can always start a new plan with the desired formula, and merge one into the other on 1/1/16.

This does seem to be legal although depending on if you go get D letters and so forth or not might not be worth it.

[EBDI]

Unfortunately there isn't a last day provision. I appreciate the suggestion of starting a new plan. I will propose that to the client. Thanks again.

[Mike Preston]

Another questionable result essentially caused by the failure of the plan sponsor to adopt a plan where every participant is in their own allocation group. Strong letter to follow.