Last Day Rule when adopting PS plan late (SECURE Act)

[Jess C]

Question came up, if an employer wishes to adopt a profit sharing plan in 2021 effective 12/31/2020, can they apply a last day rule to the 2020 profit sharing allocation?  

[Mike Preston]

Why wouldn't they be able to?

[Jess C]

2 minutes ago, Mike Preston said:

Why wouldn't they be able to?

We're having a good conversation around if this could potentially be discriminatory or anti-cutback, which leads to more questions about eligibility and how that's written into the document.

[Larry Starr]

27 minutes ago, Jess C said:

Question came up, if an employer wishes to adopt a profit sharing plan in 2021 effective 12/31/2020, can they apply a last day rule to the 2020 profit sharing allocation?  

How many angels can fit on the head of a pin?  Stop overthinking this.  Of course they can do that.  The only thing that  has changed is to give us MORE time to adopt a plan; that changes no other rules.

[Luke Bailey]

On ‎5‎/‎5‎/‎2020 at 4:05 PM, Larry Starr said:

How many angels can fit on the head of a pin?  Stop overthinking this.  Of course they can do that.  The only thing that  has changed is to give us MORE time to adopt a plan; that changes no other rules.

That's probably the right answer, but perhaps gives too short shrift to what seems a legitimate concern. An employer with an ongoing plan that did not at 12/31/2019 have a last day of year rule could not now, in 2020, go back and amend the plan to put one in for 2019. I can see how one would think that that is sort of what is occurring here. However, the SECURE Act says that such a plan is treated "as if it had been adopted as of the last day of the [prior] taxable year," and does not further elaborate. Given that wording, it is hard to see any term contained in the initial plan document as an amendment, so inclusion of the last day rule would presumably be OK.

[Larry Starr]

2 minutes ago, Luke Bailey said:

That's probably the right answer, but perhaps gives too short shrift to what seems a legitimate concern. An employer with an ongoing plan that did not at 12/31/2019 have a last day of year rule could not now, in 2020, go back and amend the plan to put one in for 2019. I can see how one would think that that is sort of what is occurring here. However, the SECURE Act says that such a plan is treated "as if it had been adopted as of the last day of the [prior] taxable year," and does not further elaborate. Given that wording, it is hard to see any term contained in the initial plan document as an amendment, so inclusion of the last day rule would presumably be OK.

I have no doubt it's ok.  Prior to the plan being adopted (after year end) with a last day provision, there was no entitlement to a contribution by anyone (there was NO plan!).  So there is no take-away of anything that would have been accrued (the right to an allocation) that would be true for an ongoing plan that existed in the prior year if a last day provision was added after participants have accrued their 1000 hours in that year. FWIW.

[Mike Preston]

I'm slammed at the moment, but are we sure a new plan can't be layered?

[Luke Bailey]

27 minutes ago, Mike Preston said:

I'm slammed at the moment, but are we sure a new plan can't be layered?

I don't think we're saying it can't. Just fleshing out the concept that a new plan adopted after the end of its first year is different from an amendment of a plan actually in effect in prior year.

 

50 minutes ago, Larry Starr said:

I have no doubt it's ok.  Prior to the plan being adopted (after year end) with a last day provision, there was no entitlement to a contribution by anyone (there was NO plan!).  So there is no take-away of anything that would have been accrued (the right to an allocation) that would be true for an ongoing plan that existed in the prior year if a last day provision was added after participants have accrued their 1000 hours in that year. FWIW.

Larry, not disagreeing.

[Larry Starr]

5 minutes ago, Luke Bailey said:

I don't think we're saying it can't. Just fleshing out the concept that a new plan adopted after the end of its first year is different from an amendment of a plan actually in effect in prior year.

 

Larry, not disagreeing.

Agreed!?