Changing compensation definition retroactively

Hi

If the plan document states tips are excluded, can the plan be amended retro to 2024 and include them, after all, increasing the benefit?

Curious.

any takers?

Response off the top of my head, no deep dive.  If this is a 401k plan, if they retroactively amend to 2024, the participants did not have an opportunity to defer on their tips.  If this is a profit sharing only or a defined benefit plan, the answer may be different.  Plus I would think you have to see if any HCEs received tips, or only NHCEs.

Building on jsample's response, if it is a 401(k) plan and the definition is amended to correct an operational error or to treat tipped employees more equitably vis a vis other employees, the employer could contribute a QNEC to make up for the fact that such employees did not have the opportunity to make elective deferrals from tips.

what's the benefit that gets increased specifically by a wage increase?  An X% money purchase contribution?  Their pro rata share of a $Y company profit sharing?  The application of a match formula?  

kinda suspecting it's not something the plan has discretion to finagle with, absent the comp definition change.

It is for a DB plan and it will increase the benefits to all non-hces, nothing else.

9 minutes ago, Jakyasar said:

It is for a DB plan and it will increase the benefits to all non-hces, nothing else.

Then I see no problem with it. I mean assuming it's not restricted by under funding or something.

if it is a DB Plan, then the question is "Why?"   What are you trying to accomplish?  If the objective is to increase the benefits for NHCEs, you can also accomplish that by increasing the benefit retroactively.

14 minutes ago, truphao said:

if it is a DB Plan, then the question is "Why?"   What are you trying to accomplish?  If the objective is to increase the benefits for NHCEs, you can also accomplish that by increasing the benefit retroactively.

Right.  The actuary can help design something to accomplish this, probably much simpler.  If tip documentation is "sketchy", you may be looking for trouble.

5 minutes ago, david rigby said:

Right.  The actuary can help design something to accomplish this, probably much simpler.  If tip documentation is "sketchy", you may be looking for trouble.

not "may be" but "highly likely"

That's the reason I am thinking of having the tipping not excluded. The sponsor may not have the correct data on the tipping part but cannot argue with the full w2/payroll records. The purpose is not to increase the benefits necessarily but to avoid getting incorrect compensation data especially if the records are not kept properly thus not exclude them for sketch records.

@Lou S.No AFTAP issues

The IRS's historical position was that, with a few exceptions that wouldn't be pertinent here, discretionary plan amendments could not be effective for plan years before the year in which they were adopted.  SECURE Act 2.0 partially reversed that policy.  New IRC §401(b)(3) provides that an amendment that increases benefits may be effective as of any day in the preceding plan year, so long as adoption is no later than the extended due date, including extensions, of the employer's income tax return for the taxable year within which ends the plan year that contains the effective date.  Since adding tips to the plan's definition of "compensation" can only increase benefits, it is unobjectionable.

I agree with the previous comments about the practical difficulties of taking tips into account, except for tips that are reported on employees' W-2's.