Amending allocation groups

[JPIngold]

While it is well documented that you can't amend the profit-sharing allocation methodology retroactive to the beginning of the year if a person has accrued a benefit (e.g. no last day requirement), does anyone have a problem with changing the allocation group definitions in a cross-tested plan if the language in the plan states that the determination of the appropriate group takes place on the last day of the plan year.

Example: Since it is a partnership, we aren't using the "everyone in his or her own rate group" method. There is no last day requirement to receive an allocation. We want to add a couple more allocation groups to allow more flexibility. Group determination is as of the last day of the plan year. Can we make this amendment effective January 1, 2015 or do we need to make it effective January 1, 2016?

To me, the language that says your group determination is as of the last day is critical, but my concern would be that adding a group would cast some doubt as to whether a person has already accrued a benefit based on the groups that were in place prior to the amendment.

Thanks.

[Bird]

Group determination is as of the last day of the plan year.

I'm not sure what that means. Does the plan say someone determines which group you are in, on the last day of the year? If so, then I don't think anyone has accrued a benefit until their group has been determined.

(But I could see an agent jumping on the "no last day" language and challenging it.)

[JPIngold]

Yes, the language in the document says:

"If a Participant shifts from one classification to another during a Plan Year, then the Participant's Group will be determined on the last day of the Plan Year, or if earlier, the date of termination of employment."

My concern is the same as yours .. plus the fact the agent could say that until now, that other classification wasn't there, so there was nothing to "shift" to until November's amendment.

[Bird]

Oh I see. Good language to have to clarify what happens if someone changes job classification. But if someone doesn't (change), then...?

It's certainly not a typical condition such as hours worked or employment status. I guess I would say that I wouldn't tell the client "it's fine." I wouldn't tell them they couldn't either. I think I'd explain it as best I could and point out the risks and let them decide. But I think I would recommend against it...

[JPIngold]

I agree ---- one year isn't worth jeopardizing a $10 million trust.

[Doghouse]

For the reasons stated, I would always draft plans to refer to the classification as of the first day of the year, rather than the last.

[Tom Poje]

the LRMs dated 10/2011 has the following language (page 131 of the pdf file not the actual page number)

the participants share of the employer contribution allocated to each such group will be based on the participants compensation for the part of the year the participant was in the group.

lrm.pdf