Corrective amendment to plan that failed 401(a)(4)

[Richard Anderson]

I have not ever done this before, so I am a little apprehensive about it. In a small cross tested plan one of the young NHCEs that is needed to pass a4 has terminated before becoming eligible. If the employer allocates 3% to all eligibles in the NHCE class, the plan will fail a4. Can the employer make a corrective amendment to give a 3% contribution to a named ineligible employee? The plan will pass if this person also gets a 3% contribution.

If this works, can the same approach be used to pass ADP/ACP test? That is, pick one or two terminated employees, and amend the plan to give them a QNEC in an amount necessary to pass ADP testing.

[Guest FredReilly]

The regulation gives you up to 10.5 months (I think) after end of plan year to do a retoractive corrective amendment. You didn't indicate the plan year, but if it is 2000 you can still do it before year end. I guess you could amend specifically to create a group for him with different allocation requirements. I would think you could make him eligible and give him 0% since he is HCE. That might be strectching it a bit.

For the QNEC it would be slightly different, particularly if there is an existing QNEC allocation structure in the plan. You would need to be careful to differentiate them. Also, I have seen some plans (including Corbel) which use some language that indicates a specific QNEC allocation method must be used if an ADP or ACP test fails. I would want to make the amendment before the end of the year to insure there is no conflict with existing plan language.

[Richard Anderson]

The original post has a typo; the person that was ineligible that I need to bring in is a NHCE, not HCE. Sorry about that.

[Guest Big Guy]

Section 1.401(a)(4)-11(g)(4) provides that a corrective amendment must 'have substance' which means that it must provide a benefit to non-terminated employees (or possibly a vested benefit to terminated employees). Amending the plan to provide a non-vested benefit to a terminated employee won't work. It appears that you will have to provide a larger allocation to the existing NHCE to pass

[Richard Anderson]

Thanks Big Guy. What if the amendment also states that the contribution will have some minimum vesting, such as 20%?

[AndyH]

Our "standard" corrective amendment calls for an increase in the contribution for the youngest NHCE in the failing rate group. The contribution is increased in an amount sufficient to raise his EBAR above that of the failing HCE. Once done, the next youngest is increased in the same manner if needed.

Many of our plans have this language as a "failsafe provision". On submission, the IRS reviewers have almost always approved it without challenge.

[Guest FredReilly]

In regards to the vesting of contributions pursuant to a corrective amendment I have had an IRS reviewer insist that economic substance means full vesting. This came up in an IRSASPA conference as well.

If the amendment is made before year end I think a strong argument can be made that it is not a "corrective amendment" and that only the regular vesting under the plan applies.

[Guest]

Reg. sec. 1.401(a)(4)-11(g)(iv) requires that the corrective amendment be adopted " on or before the 15th day of the 10th month" after the end of the plan year for which the correction is made. I read this to mean that you have 9.5 months to make the corrective amendment.

[Guest mo again]

This could be just plain wrong, but what I have seen most frequently is an amendment similar to the following: "Anything in this plan to the contrary notwithstanding, for the plan year ended ______, a fully (100%) vested discretionary contribution shall be credited to the profit sharing account of John Doe."