Amending to Increase Benefits

[Dougsbpc]

We administer a defined benefit plan and a 401(k) plan for a small employer.

They have two shareholders (husband and wife) and 3 full time employees.

Just the shareholders participate in the DB (passes 401(a)26).

All participate in the 401(k) plan. The 3 non-shareholder employees get a 7.5% contribution in the 401(k) plan every year. Both plans together pass 401(a)4.

The DB plan has had and still has a benefit formula of 5% of FAC per year of participation. They want to increase benefits (with a fresh start of course) to 9% of FAC for each year of participation. Would this be considered discriminatory because the amendment itself is just raising benefits for HCEs? All other employees are excluded but are getting adequate contributions in the the 401(k) plan every year.

Would this type of amendment be considered discriminatory?

Thanks

[Bri]

The new 401(b)(3) rule doesn't require the post-year-end new benefits to separately pass 401a4 in and of themselves, unlike the way an -11g amendment used to.

[FORMER ESQ.]

The way I interpert the Treasury Regulations is that a proposed amendment (tested independently) must be non-discriminatory in timing or effect. That is, even if the plan passes its annual non-discrimination test (by including the higher benefits from the amendment) that does not mean that the amendment itself is non-discriminatory. So, if the amendment increases HCEs benefits, but NHCEs are not receiving any increase, I would take the position that it is discriminatory. Would love to hear from others. 

[FORMER ESQ.]

1 minute ago, Bri said:

The new 401(b)(3) rule doesn't require the post-year-end new benefits to separately pass 401a4 in and of themselves, unlike the way an -11g amendment used to.

And this is why this forum is excellent. Thank you!!