Amend to change Profit Sharing Allocation method after year end

sponsor of a 401k/Safe harbor Match/ Profit Sharing plan is adding a cash balance plan retroactive to 2024 (corp. tax returns not yet filed).

they want to change 2024 Profit Sharing contribution allocation method, from integrated with social security, to new comp. Employees will receive a greater profit sharing contribution when using new comp as compared to integrated, so they are not losing anything. HCE's will be getting a smaller contribution because they are getting a big number in the cash balance. 

Can this be done by amending the DC retroactive to 2024, in addition to adopting the cash balance? 

Thank you for your guidance!
O.R.

Can’t amend the allocation retroactively. What you can do is start a new PS only plan retroactively with the allocation method you want. Then merge that plan and the 401(k) in 2025, if you want. Or keep it as a stand alone PS. We’ve done it both ways. 

Or, if the document allows, perhaps declare no profit sharing, but the plan will override that with a top-heavy minimum requirement. Be sure to check if the plan document only gives top-heavy to the nonkey employees or to everyone, I’ve been surprised a few times to see it apply to all employees.

Next, if cross-testing, the DC plan may also override the top-heavy allocation for the NHCEs by requiring a gateway minimum. Too bad for the key employees and HCEs, not getting a high PS amount, but this might be good enough to avoid setting up an extra retro plan, to pay for it, administer it, to also write a merger agreement to merge, and to do the merger.

Be careful if this is a professional service employer and the 6% contribution limit applies. If for some crazy reason, a key employee is not getting a match, they might have to declare some small profit sharing amount for everyone just to get a small allocation in their so their compensation can be counted in the 6% contribution limit, then after that add the top-heavy and the gateway to the others.

i have seen a lot of takeover 401(k) plans that have 100% immediate vesting for profit sharing, so if that is against the employer desires or if they do want a higher profit sharing amount for the owners (if there is room to do so) then they would need to adopt a retro PS only plan with a vesting schedule and each participant in their own allocation rate group. When the plans merge, have the merger agreement state that this new plan will be the surviving plan in order to retain the vesting schedule.

Sounds really easy, right? Be sure to bill properly for all of that!

Agree you cannot retroactively amend PS formula for 2024. Also, depending on the terms, it might be too late to amend 2025 as well, if anyone has already become entitled to a PS allocation.

You could back into the total PS contribution that would get HCEs where you want them and which would provide a lower NHCE PS than is needed to pass testing. Then you can amend the PS under 11(g) to provide the added NHCE PS needed to pass, or under SECURE 2.0 any retroactive amendment to increase benefits is Ok now.

Doing zero PS in existing plan and adopting new PSP retro with formula as you need/want is a good way to go if they don't mind the expense of the second extra plan for a couple of years.

As John noted, if the CBP is PBGC-exempt be wary of the combined plan deduction limit and having to limit DC ER to 6% total, which will be very challenging with a SHM.

19 hours ago, John Feldt ERPA CPC QPA said:

Or, if the document allows, perhaps declare no profit sharing, but the plan will override that with a top-heavy minimum requirement. Be sure to check if the plan document only gives top-heavy to the nonkey employees or to everyone, I’ve been surprised a few times to see it apply to all employees.

Next, if cross-testing, the DC plan may also override the top-heavy allocation for the NHCEs by requiring a gateway minimum. Too bad for the key employees and HCEs, not getting a high PS amount, but this might be good enough to avoid setting up an extra retro plan, to pay for it, administer it, to also write a merger agreement to merge, and to do the merger.

Be careful if this is a professional service employer and the 6% contribution limit applies. If for some crazy reason, a key employee is not getting a match, they might have to declare some small profit sharing amount for everyone just to get a small allocation in their so their compensation can be counted in the 6% contribution limit, then after that add the top-heavy and the gateway to the others.

i have seen a lot of takeover 401(k) plans that have 100% immediate vesting for profit sharing, so if that is against the employer desires or if they do want a higher profit sharing amount for the owners (if there is room to do so) then they would need to adopt a retro PS only plan with a vesting schedule and each participant in their own allocation rate group. When the plans merge, have the merger agreement state that this new plan will be the surviving plan in order to retain the vesting schedule.

Sounds really easy, right? Be sure to bill properly for all of that!

John, I don't believe that you can start a new DC plan when you have an existing DC plan and not mirror the vesting in the existing plan.  You can obviously add a DB plan with service for vesting excluded prior to the start of that plan, but not two like plans.  IRS or DOL would not be ok with the participant being 100% vested if we made the contribution to this PS plan, so we made it to this other plan we adopted and 0% vested the participant.

The new PS plan would count service before the plan for vesting, but what citation prevents that new plan from using a 6-year graded vesting schedule?

Most docs I have seen reference the predecessor plan rule and the 5 years before and after the adoption of the second plan.

That’s not the issue as I see it. The new plan is counting all the predecessor service, but is the statement above saying the new plan cannot adopt a 6-year vesting schedule using all that service? If so, where’s the citation for that?

On 7/9/2025 at 4:38 PM, David D said:

John, I don't believe that you can start a new DC plan when you have an existing DC plan and not mirror the vesting in the existing plan.  You can obviously add a DB plan with service for vesting excluded prior to the start of that plan, but not two like plans.  IRS or DOL would not be ok with the participant being 100% vested if we made the contribution to this PS plan, so we made it to this other plan we adopted and 0% vested the participant.

What is the basis for that?  I do not see in §1.411(a)-5(b)(3) any reference to distinction by plan type.  If it is a "replacement" plan, then sure, but is it?  And if it is, what makes a DB plan not to be a "replacement plan"? The old plan exists, and a new plan is being added to accomodate whatever, with a different structure of benefits and vesting.  

@John Feldt ERPA CPC QPA@truphao  My apologies, I never saw notifications that either of you had replied to me.  This issue first came up for me more than 15 years ago when I was working with a firm that would often get CB plan referrals from an ERISA counsel firm that was hired to “correct” many DC plans that had been administered by a “bundled” provider.  From what I remember their opinion was that if essentially the only change from the existing plan to the new plan was the allocation method, then it in effect was an “amendment” to the “Plan” and that the vested percentages were protected until IRC 411(a)(10).  Obviously, any new participants going forward could have the new vesting schedule, but those already vested in the existing plan would be grandfathered. I have not worked for that firm since 2017, but the 3 actuarial firms I currently work with have taken the same position. In reading the comments now it seems that this is a very conservative position and perhaps not the norm in the business?  For me I think I will continue in the approach I have been accustomed to so that in the event of audit, I don’t have to defend the vesting position.  It was also their opinion that a new plan of a different type does not need to protect vested percentages as the new plan type does not have anybody previously vested in that plan type.

Is the argument that the adoption of a new plan is treated like an amendment to the existing plan or plans of the employer? Even if the plans are not identical? (For example, one allows deferrals and safe harbor, the other does not allow either)

The rules distinguish between a discretionary amendment and the adoption of a new plan, as the rules apply differently for amendments than for the adoption of a new plan. See Rev Proc 2016-37, section 15.04.

And if it is the adoption of a new plan, not an amendment, what prevents it from applying a different method for allocations than the existing plan? I know some attorneys who might argue you can just adopt another type of PS in the existing document, if the language allows, and not bother with another plan (for example, to avoid the pro-rata no conditions allocations in the existing plan).

Vesting changes under 411(a)(10) appear to only apply to an amendment to the plan, so that’s why the new PS only plan is suggested. Of course, if there is evidence or citation that such a new plan is really just an amendment to the existing plan, let’s go over that.

I’m not sure if this helps or changes anyone’s opinion. Maybe calling a new plan an amendment is not the argument being made here?

That these experienced advisers are not in entire concord suggests there are a few interpretations that might meet tax law’s standard for a “substantial authority” position—one that need not be flagged in a tax return.

Does a TPA or other consultant write up an explanation of each of those interpretations, to let one’s client choose its risks and opportunities?

@John Feldt ERPA CPC QPA I definitely see more of the adoption of a PS only plan in the last few years as many more employers have 401k plans than they did back when I first encountered this.  So it seems the position you are taking is that while you are granting service for vesting based on the predecessor plan rules, you can use a different vesting schedule in the new plan to count that service towards.  I have not seen this approach personally. As I said, I didn't realize I and others were taking the conservative approach.

@Peter Gulia  I imagine it runs from one extreme to another with what a TPA tells their client on the plan(s) they have designed. For me I am mostly working with DB/DC combo's and I have found it is best to explain to the client as much as possible how the Cash Balance plan works - who gets a meaningful benefit, who gets a flat dollar amount or percentage, who gets nothing, etc..  Of course, if I ever take what I feel is an aggressive position on something I do bring that to their attention and give them the choice on which way they want to go, but not sure what others do.

19 hours ago, David D said:

@Peter Gulia  I imagine it runs from one extreme to another with what a TPA tells their client on the plan(s) they have designed. For me I am mostly working with DB/DC combo's and I have found it is best to explain to the client as much as possible how the Cash Balance plan works - who gets a meaningful benefit, who gets a flat dollar amount or percentage, who gets nothing, etc..  Of course, if I ever take what I feel is an aggressive position on something I do bring that to their attention and give them the choice on which way they want to go, but not sure what others do.

David,  we are getting  a lot of situations where the client/prospect already has an existing 401(k) Plan through ADP, Paychex, and the likes.  This is usually a total crap from the perspective of accomodating a CB Plan.   So, more often than not a workable solution is to add a CB Plan and a stand-alone PS plan just to get going  to accomodate the proper eligibiltiy, entry, TH minimums, etc.  The actual benefit level design is limited by imagination and creativity only.

@truphao  Same here. We often are forced to set up a new PS just to accommodate what the client desires for the current year (which is almost always after the year end).  We typically then merge the new plan we created into the existing one in the following year. The client then pays administrative fees for 3 plans for 2 years, but the benefit of the combined plan testing results outweigh the cost, especially when running the disaggregated testing if the existing plan has earlier entry dates than we prefer for the CB plan.