Adding a new retroactive PS Plan in addition to existing 401k/PS Plan

[TPAinPA]

We have a prospect that has a current 401k Plan in place with safe harbor match, new comp profit sharing.  The employer terminated several of the younger employees and now doesn't like the new comp allocation. 

Any thoughts about not making a discretionary contribution in the 401k, instead establishing a new retroactive PSP, grandfathering all current participants and not including a last day rule so those younger employees would be included?  Is there a trap I'm missing?

[Bill Presson]

Just do an -11g amendment to bring the terminated people back in to the existing plan. Now that will mean the contributions for those people would be deductible in 2026 and not 2025.  It your testing would work. Make sure vesting is addressed. 
 

You could explore doing a 401b3 amendment and it might work here instead. But I can’t promise that as I haven’t waded through everything. But if it does, the contributions would be deductible in 2025. 

[Peter Gulia]

For a reader who might explore the uses, here’s Internal Revenue Code § 401(b)(3) (as compiled in the United States Code):

(3) Retroactive plan amendments that increase benefit accruals

If—

(A) an employer amends a stock bonus, pension, profit-sharing, or annuity plan to increase benefits accrued under the plan effective as of any date during the immediately preceding plan year (other than increasing the amount of matching contributions (as defined in subsection (m)(4)(A))),

(B) such amendment would not otherwise cause the plan to fail to meet any of the requirements of this subchapter, and

(C) such amendment is adopted before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof) which includes the date described in subparagraph (A),

the employer may elect to treat such amendment as having been adopted as of the last day of the plan year in which the amendment is effective.

I.R.C. (26 U.S.C.) § 401(b)(3) https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapD-partI-subpartA-sec401.htm.

[austin3515]

I have done what you suggest in scenarios where the existing plan is a comp to comp or integrated allocation, and I ran the fact pattern by a highly respected compliance service.  There is absolutely no rule against setting up a new profit sharing plan just because you have another existing one. That was the answer I received.

[Jakyasar]

Very common to add a second PS only plan and merge the 2 plans later. However, is this a cost-effective way to approach i.e. between the plan set up and annual administration? Afterall, you may only need a small amount of contribution to pass.

As Bill mentioned, 11-g is a solution with the terminated employees but they will need a vesting adjustment, some say partial, some say 100% vesting. If they are already 100% vested, no issues.

But, can you amend the plan now to increase the benefit retro to 2025 e.g. remove last day rule and/or 1000 rule only for 2025? I do not know the answer to it. If you can, then you can deduct for 2025.

just thinking out loud with some random thoughts.

[austin3515]

2 minutes ago, Jakyasar said:

As Bill mentioned, 11-g is a solution with the terminated employees but they will need a vesting adjustment, some say partial, some say 100% vesting. If they are already 100% vested, no issues

I was rushing meant to clarify that this is 100% the better solution.  There was an IRS FAQ way back when this fact pattern was posed to the IRS and they said that an 11g was acceptable.  It wasn't precisely the same but it was pretty much the same. The point was you dont have to be failing a test with no other means of passing to be able to do an 11g amendment, and the question was about making people eligible who were not previously eligible.  I found it, it was the ASPPA Annual Conference Q&A from 2010.  I know it is from behind the paywall where I got it, so not sure I can share it.