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Retroactive amendment to create additional HCE PS allocation group

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Medical practice with SH 401(k) lists two groups of HCEs - one for the doctor and another for non-physician HCEs (doctor's wife).  A third group is for all other continuing employees and a fourth group for terminated employees.

Doctor's adult daughter now working for the practice and became eligible for the plan in 2022.  Is it possible amend the plan retroactively to put the daughter in a separate group from the doctor's wife?  Giving the daughter the same percentage allocation as the wife is killing my non-discrim test.

Thanks for any help!

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If this would result in the daughter getting a smaller allocation, then no. 411(d)(6) prohibits amendments which would result in the cutback of an accrued benefit, even if it only affects HCEs. Unless the plan has a last-day requirement, or a service requirement which hasn't yet been satisfied, then you couldn't even make that amendment effective in the current year. It would have to take effect as of the next plan year.

I would recommend that the plan be amended to put each participant in their own group going forward. This will give the plan sponsor the ability to give different allocations to each employee at their discretion each year.

Regarding the testing issue, could restructuring the plan into component plans help?

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.

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Agreed, too late for 2022, you either give wife and daughter much less (or zero), give NHCEs more to pass, look at restructuring, or maybe an 11g to bump up necessary number of NHCEs (but not to create new HCE group).

Also agree that individual allocation groups is the best/most flexible way to go and don't see a reason for nearly every cross-tested plan to be designed that way.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services


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