Change Profit Sharing Formula Mid-Year!

Hi Everyone, 

Here is what happened: my client would like to change the profit-sharing formula mid-year. The current plan profit sharing is 8% to eligible employees. There is no age, no service required, and no last-day service requirements for the profit-sharing contribution, and the contribution is being funded per payroll. There are 1000 hours for vesting. 

Now, the client would like to change the formula to lower it based on age.

If age 45 or less: 4%

   Age 46-59: 6%,

  Age 60 and above: 8%.

They like to make it effective mid-year.  From my understanding is the formula was already set for the plan year 2024, the client cannot change it anymore. I understand they can amend the plan to have it effective 01/01/2025. 

My question: Is it possible to change the PS formula mid-year 2024 in this case? if yes, what are the consequences that we need to know? 

Thanks in advance for all the input!

You mention 1000 hours for vesting, and no service (for eligibility?) but does the plan require 1000 hours for an allocation? 

The plan has no eligibility requirements. No age, service, hours, and last-day requirement. It immediately entry. The 1000 hours are for vesting only.

Then everyone's earned the right to the 8% already simply by being employed.

I don't know for sure how aggressive it's considered to say, okay you'll get 8% of your pay up through the date we make the change but then some other stated X% after that effective date through the end of the year.

42 minutes ago, Bri said:

Then everyone's earned the right to the 8% already simply by being employed.

I don't know for sure how aggressive it's considered to say, okay you'll get 8% of your pay up through the date we make the change but then some other stated X% after that effective date through the end of the year.

Thank you for the info. Yes, that was my original thought that everyone would get 8% through the date the plan is amended which is 7/1/2024. But I did some research, some indicated that because the profit sharing is not a discretionary formula, it can't be changed in mid-year. you cannot take away the benefits that employees already accrued. The plan can be amended for the next plan year effective 01/01/2025. That is where I got stuck on now. Is it possible to amend the plan mid-year or next plan year?

If the plan says 8% annually w/o conditions then everyone gets 8% for 2024 and cannot change that until 2025. However, if the allocation period is not annual and the plan says each payroll period is 8%, then you may have a case for amending future payroll periods. It's the plan language that is important here, not their payroll/deposit/allocation practices. If you are able to amend, I think you need to provide ERISA 204(h) notices to those seeing the future reduction, which must be done 45 days (large plans) or 15 days (small plans) in advance.

As implied, there could be a 411(d)(6) violation in the proposed change.  As @CuseFan points out, "It's the plan language that is important here..." so this plan sponsor would benefit from review by ERISA counsel.  

In addition, this sponsor could benefit from some experienced consulting advice about:  the details of the benefit structure within the plan, what minimums and/or maximums could apply, defining the covered group(s), what non-discrimination testing is relevant, how to build in future flexibility, etc.  I'm mostly retired, so that advice would not come from me, but I can offer some recommendations if needed.

1 hour ago, CuseFan said:

If the plan says 8% annually w/o conditions then everyone gets 8% for 2024 and cannot change that until 2025. However, if the allocation period is not annual and the plan says each payroll period is 8%, then you may have a case for amending future payroll periods. It's the plan language that is important here, not their payroll/deposit/allocation practices. If you are able to amend, I think you need to provide ERISA 204(h) notices to those seeing the future reduction, which must be done 45 days (large plans) or 15 days (small plans) in advance.

Hi Kenneth, 

Thank you for the info. Yes, the allocation period is per payroll not annual, which I believe the client can amend the plan mid-year. Yes, it is a large plan that will require 204h of 45 days' notice.  I just want to make sure this can be done. I have not run into this situation before. 

I don't believe a 204(h) notice is required for a profit sharing plan, EVEN if the PS plan has a fixed formula. Check ERISA 204(8)(B), Treasury regulation 54.4980F-1, and IRC 4980F(f)(2). But maybe I'm missing something.

Certainly won't hurt anything if you give one - I just don't think it is necessary.

On 1/19/2024 at 5:17 PM, Panda said:

Yes, the allocation period is per payroll not annual

Be careful here. Does the plan say the allocation period is per payroll, or is it funded each payroll as a cash flow consideration?

FWIW I can't imagine setting up a PS plan with a fixed formula and no allocation conditions.