Variation of Last Day Rule

[jpod]

This issue is not limited to cross tested plans, but I had to post this somewhere.

Discretionary profit sharing plan. Employer doesn't want to use the standard "last day rule" as a condition to receiving an allocation. It wants to have a rule that says the participant must be employed on the date that annual year-end bonuses are paid in December. This date is in mid-December, but it can vary by several days. In the employer's mind it feels that if an employer is entitled to a cash bonus than he should be entitled to a profit sharing contribution, even if he quits the day after. Anyone see anything wrong with the fact that the date is not a definite date but one that is subject to the control of the employer?

[K2retire]

What will they do if there is a year when they don't pay bonuses?

[jpod]

Good question. We would have to draft around that by having a last day rule if no bonuses are paid.

[Tom Poje]

I wouldn't say it is 'not a definite date', it is a date that will vary from year to year, but it is still a specific date, and not left of to a random choice - e.g. Bob was a long time ee who quit on Dec 12 so we choose that date to make sure he gets something in profit sharing

[jpod]

So, Tom Poje, are you saying you think it's ok? I think it's ok, but I've never seen this before. The employer's logic is rather compelling. It views itself as providing a single annual bonus, just divided into two buckets: one bucket is a cash, taxable bonus and the other bucket is the profit sharing plan. Employment on the bonus payment date is required to receive the bonus, and logically, in its view, the same standard should be applied to the profit sharing plan allocation.

By the way, as to K2retire's question, if things are so bad for a year (like 2009, for example), that there are no year-end bonuses, it is extremely unlikely that there would be any profit sharing contributions, so as a practical matter the point is moot, but I realize that we will have to draft for that contingency.

[BG5150]

I wouldn't say it is 'not a definite date', it is a date that will vary from year to year, but it is still a specific date, and not left of to a random choice - e.g. Bob was a long time ee who quit on Dec 12 so we choose that date to make sure he gets something in profit sharing

But what about: Bob left on Dec 12. We didn't like Bob, so we pushed back the bonus date to Dec. 13.

[jpod]

BG5150: What qualification rule does that violate?

[DMcGovern]

The event timing may be "not a definite date", but the Employer would then be able to manipulate who does or does not receive a bonus, and thus a profit sharing allocation. Similar to what BG5150 is saying.

[jpod]

I am not following the line of thinking here. If you have a last day rule there is no qualification rule that would prevent an employer from terminating someone right before the last day just to cause him to lose his profit sharing allocation. You may have an ERISA Section 510 problem, but that's not what we are exploring here.

Are you saying, for example, that an employer may intentionally delay bonus payments - and the resulting profit sharing allocations - after employee x has given his two weeks notice before resigning? If you are, I ask again what is the qualification problem with that?

[DMcGovern]

Good point, jpod. The EOB Ch. 3A, Section II, Part H states that "there are no specific statutory rules relating to allocation conditions" in a DC plan. It further states that "the DOL recognized that the absence of accrual requirements for defined contribution plans enables such a plan to prescribe reasonable allocation conditions, such as an hours requirement and/or a last day employment requirement".

So, a couple questions come to mind:

1) Is the allocation condition you are proposing "reasonable"?

2) Is this an option allowed under the plan document you have?

Note: I'm not sure this would qualify as a "last day" allocation condition. That is generally defined as the last day of the plan year, or a specific allocation date (such as quarterly allocation dates). But, this point may not matter here.

[BG5150]

jp: I don't have an answer for you, I was just thowing it out there for discussion.

Would the bonus date have to be set before the plan year?

If the bonuses are paid within a certain few days every year, why not just make the timing the week before it?

[Kevin C]

BG5150: What qualification rule does that violate?

How about this?

1.411(d)-4, Q-6: May a plan condition the availability of a section 411(d)(6) protected benefit on the satisfaction of objective conditions that are specifically set forth in the plan?

A-6: (a) Certain objective conditions permissible—(1) In general. The availability of a section 411(d)(6) protected benefit may be limited to employees who satisfy certain objective conditions provided the conditions are ascertainable, clearly set forth in the plan and not subject to the employer's discretion except to the extent reasonably necessary to determine whether the objective conditions have been met. Also, the availability of the section 411(d)(6) protected benefit must meet the nondiscrimination requirements of section 401(a)(4). See §1.401(a)-4.

(2) Examples of permissible conditions. The following examples illustrate permissible objective conditions: a plan may deny a single sum distribution form to employees for whom life insurance is not available at standard rates as defined under the terms of the plan at the time the single sum distribution would otherwise be payable; a plan may provide that a single sum distribution is available only if the employee is in extreme financial need as defined under the terms of the plan at the time the single sum distribution would otherwise be payable; a plan may condition the availability of a single sum distribution on the execution of a covenant not to compete, provided that objective conditions with respect to the terms of such covenant and the employees and circumstances requiring execution of such covenant are set forth in the plan.

(b) Conditions based on factors within employer's discretion generally impermissible. A plan may not limit the availability of section 411(d)(6) protected benefits permitted under the plan on objective conditions that are within the employer's discretion. For example, the availability of section 411(d)(6) protected benefits in a plan may not be conditioned on a determination with respect to the level of the plan's funded status, because the amount of plan funding is within the employer's discretion. However, for example, although conditions based on the plan's funded status are impermissible, a plan may limit the availability of a section 411(d)(6) protected benefit (e.g., a single sum distribution) in an objective manner, such as the following: (1) single sum distributions of $25,000 and less are available without limit; and (2) single sum distributions in excess of $25,000 are available for a year only to the extent that the total amount of such single sum distributions for the year is not greater than $5,000,000; and (3) an objective and nondiscriminatory method for determining which particular single sum distributions will not be available during a year in order for the $5,000,000 limit to be satisfied is set forth in the plan.