Retroactive amendment to lower NRA

[cpc0506]

Client paid out a participant in 2018 as she terminated employment and was age 65.  The only problem is that the NRA in the plan is the later of: 65 or 5th year of participation.  Employee only had 4 years of participation at termination.  She terminated one week after reaching age 65. Client does not want to ask for the unvested funds back.  Can the client adopt a retroactive amendment to change the NRA to 65 only? 

[Mike Preston]

If she is NHCE I don't see why not.  Have to do it as a 2007-44 amendment within the RAP for the plan sponsor.

[cpc0506]

14 hours ago, Mike Preston said:

If she is NHCE I don't see why not.  Have to do it as a 2007-44 amendment within the RAP for the plan sponsor.

It was my understanding that RAP had to do with interim amendments and not discretionary amendments which still have a Year End adoption date requirement.

[Calavera]

Under 1.411(a)-(7) anniversaries are counted from the first day of the year in which a participant commenced participation. What was the date of participation, and what is her DOB?

[cpc0506]

She turned 65 in November 2017 and entered the plan on 1/1/2013.  So, I don't think her 5th year anniversary occurs until 1/1/2018 and she was not employed on that date.

[Mike Preston]

6 hours ago, cpc0506 said:

It was my understanding that RAP had to do with interim amendments and not discretionary amendments which still have a Year End adoption date requirement.

Certainly safe that way.  If an amendment is adopted after EOY and before end of RAP it still "counts" if submitted.  At least that was the rule before the IRS put the brakes on submissions.

[Luke Bailey]

This seems like a discretionary amendment to me. Would be easy to submit under VCP for retro amendment and you would get, but I think that's what you have to do.

[chc93]

Can the unvested money that was distributed be returned to the plan from the company... maybe EPCRS... where the plan is then made whole.

[Kevin C]

17 hours ago, Luke Bailey said:

This seems like a discretionary amendment to me. Would be easy to submit under VCP for retro amendment and you would get, but I think that's what you have to do.

I agree with Luke.  It's an operational failure and too late for a discretionary amendment.  It's not one of the allowable retroactive corrective amendments under SCP, so that leaves VCP.  If it's an NHCE, I wouldn't expect any problems getting it approved. 

[Peter Gulia]

To the extent the plan provides that forfeiture balances are allocated among participants' accounts or are used toward plan-administration expenses that would be charged against participants' accounts, does the Internal Revenue Service expect the plan's administrator to restore a portion of the forfeiture balance and correct the accounting to what would have resulted had the administrator correctly applied the plan's (before-amendment) provisions?

Does the IRS ask for a showing that no one beyond the employer/administrator was harmed by the error?

[Kevin C]

54 minutes ago, Fiduciary Guidance Counsel said:

To the extent the plan provides that forfeiture balances are allocated among participants' accounts or are used toward plan-administration expenses that would be charged against participants' accounts, does the Internal Revenue Service expect the plan's administrator to restore a portion of the forfeiture balance and correct the accounting to what would have resulted had the administrator correctly applied the plan's (before-amendment) provisions?

Does the IRS ask for a showing that no one beyond the employer/administrator was harmed by the error?

If you are using the EPCRS correction method for overpayments to correct payment of non-vested amounts and the participant does not return the overpayment, the correction method says that the employer or another person must contribute the necessary amount to the plan to make the correction and it gets allocated using plan provisions.

But, note that a retroactive amendment as discussed above is also an option under (f) below.  If you are not correcting by retroactive amendment, I would expect the correction to be done under SCP with no IRS involvement.
 

Quote

 

Rev. Proc. 2018-52 6.06

(4) Correction of Overpayment (defined contribution plans and 403(b) Plans). (a) In general. An Overpayment from a defined contribution plan or 403(b) Plan is corrected in accordance with the Return of Overpayment method set forth in this section 6.06(4). Under this method, the employer takes reasonable steps to have the Overpayment repaid to the plan, adjusted for Earnings at the plan's earnings rate from the date of the distribution to the date of the correction of the Overpayment.

(b) Make-whole contribution. To the extent the amount of an Overpayment adjusted for Earnings at the plan's earnings rate is not repaid to the plan, the employer or another person must contribute the difference to the plan. The preceding sentence does not apply when the failure arose solely because a payment was made from the plan to a participant or beneficiary in the absence of a distributable event (but was otherwise determined in accordance with the terms of the plan (for example, an impermissible in-service distribution)).

(c) Unallocated account. Except as provided in section 6.06(4)(d), a corrected Overpayment, adjusted for Earnings at the plan's earnings rate to the date of the repayment, is to be placed in an unallocated account, as described in section 6.06(2), to be used to reduce employer contributions (other than elective deferrals) in the current year and succeeding year(s) (or, if the amount would have been allocated to other eligible employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other eligible employees in accordance with the plan's allocation formula).

(d) Repayment by the participant or beneficiary. To the extent an Overpayment was solely considered a distribution in the absence of a distributable event but was otherwise determined in accordance with the terms of the plan, any amount returned to the plan by the participant or beneficiary is to be allocated to his or her account.

(e) Notification of employee. Except as provided in section 6.02(5)(c) with respect to the recovery of small overpayments, the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment accorded to distributions from an eligible retirement plan under §  402(c)(8)(B) (and, specifically, was not eligible for tax-free rollover).

(f) Other correction methods. Other appropriate correction methods may be used to correct Overpayment failures from a defined contribution plan. Depending on the nature of the Overpayment, an appropriate correction method may include using rules similar to the correction method in section 6.06(4)(a) but having the employer or another person contribute the amount of the Overpayment (with appropriate interest) to the plan instead of seeking recoupment from a plan participant or beneficiary. Another example of an appropriate correction method includes a Plan Sponsor adopting a retroactive amendment to conform the plan document to the plan's operations (subject to the requirements of section 4.05). Any other correction method used must satisfy the correction principles of section 6.02 and any other applicable rules of this revenue procedure.

 

 

[Peter Gulia]

Kevin C, thank you for the good learning.