11(g) Amendment

Client has a calendar year SH NE 401(k) plan. PS allocation conditions are 1,000 hours and last day.  The client wants to amend the plan retroactively to 1/1/17 to remove the last day requirement since operationally that is what happened.  Can we use an 11(g) amendment to accomplish this?  If not, is there any other way to accomplish this?

Sure, as long as it otherwise satisfies the requirements of an -11(g) amendment.

Mike,

One of the owners terminated before 12/31/17, but worked 1,000 hours and mistakenly received a PS contribution.  That is why the client wants to remove the LD requirement and bring in all terminated employees with 1,000 hours.  Is your answer the same?  Everyone is in their own class and there would not be a cutback in benefits.  The amendment is not needed to pass 410(b) or 401(a)(4).  That's why I'm having a hard time understanding this.  It seems like it would be a discretionary amendment that would have to be adopted before the end of the year. Does an 11(g) amendment really have this much flexibility?   

Yes, but re-read the following words: "as long as it otherwise satisfies the requirements of an -11(g) amendment."

If the only person who gets to keep his/her allocation based on the 11(g) amendment is a 5% owner, then as Mike is suggesting, I think, the amendment would fail the nondiscrimination requirement of 1.401(a)(4)-11(g)(3)(v).

Thank you for your reply.  There would be a few NHCEs included. 

I think Mike is (cryptically) suggested you read the reg thoroughly to review the requirements.  This one might be of note (boiled down - the amendment itself may not be discriminatory):

(v)Corrective amendment for coverage or amounts testing -

(A)Retroactive benefits must be provided to nondiscriminatory group. Except as provided in paragraph (g)(3)(v)(B) of this section, if the corrective amendment is adopted after the close of the plan year, the additional allocations or accruals for the preceding year resulting from the corrective amendment must separately satisfy section 401(a)(4) for the preceding plan year and must benefit a group of employees that separately satisfies section 410(b) (determined by applying the same rules as are applied in determining whether a component plan separately satisfies section 410(b) under § 1.401(a)(4)-9(c)(4)). Thus, for example, in applying the rules of this paragraph (g)(3)(v), an employer may not aggregate the additional accruals or allocations for the preceding plan year resulting from the corrective amendment with the other accruals or allocations already provided under the terms of the plan as in effect during the preceding plan year without regard to the corrective amendment.

I don't do cryptically.  Or do I?

On 6/4/2018 at 5:23 PM, Luke Bailey said:

If the only person who gets to keep his/her allocation based on the 11(g) amendment is a 5% owner, then as Mike is suggesting, I think, the amendment would fail the nondiscrimination requirement of 1.401(a)(4)-11(g)(3)(v).

I think you are misreading it.  The 11g amendment doesn't ALLOW him to keep his/her allocation, is allows EVERYONE an allocation in a non-disciriminatory method.  The allocation to the HCE was NOT "his allocation"; it was a mistake and had to be taken away if they did not otherwise make it work.  If we do an amendment that allows all eligible employees with 1000 hours  to have a standard PS allocation regardless of their year end status, that is a perfectly permissible provision and I can't even think of a way it could fail non-discrimination in the example you give us.

RLR said: "It seems like it would be a discretionary amendment that would have to be adopted before the end of the year. Does an 11(g) amendment really have this much flexibility? "

The answer is an emphatic YES!  IT is a discretionary amendment but as long as it meets all the requirements of an 11g, it is ok to adopt it right up until 10/15 (for a calendar year plan) and have retroactive effect. 

WOT A COUNTRY!

You need to brush up your imagination skills. How about only 1 hce? 

What are you concerned about; where do you see a problem?  Aren't we passing 410(b) with this group?  What am I missing?

If the effect of the amendment, standing on its own, divorced from the provisions of the plan before the amendment, results in a single HCE getting something and no similar NHCE's then it wouldn't satisfy 410(b).

1 minute ago, Mike Preston said:

If the effect of the amendment, standing on its own, divorced from the provisions of the plan before the amendment, results in a single HCE getting something and no similar NHCE's then it wouldn't satisfy 410(b).

Of course, but in this example he said way back at the beginning the following:
One of the owners terminated before 12/31/17, but worked 1,000 hours and mistakenly received a PS contribution.  That is why the client wants to remove the LD requirement and bring in all terminated employees with 1,000 hours.

That's why I said: If we do an amendment that allows all eligible employees with 1000 hours  to have a standard PS allocation regardless of their year end status, that is a perfectly permissible provision and I can't even think of a way it could fail non-discrimination in the example you give us.

Of course, he didn't give us the actual numbers, but it sure sounds like we have a 410(b) group, no?

I know we are both preaching from the same pulpit. Maybe I've just recently been burned by actual numbers when any reasonable interpretation of the description would be harmless.  Bottom line for me is: pretend I'm from Missouri.

Using the paragraph Bird cited but highlighting differently in bold face

v)Corrective amendment for coverage or amounts testing -

(A)Retroactive benefits must be provided to nondiscriminatory group. Except as provided in paragraph (g)(3)(v)(B) of this section, if the corrective amendment is adopted after the close of the plan year, the additional allocations or accruals for the preceding year resulting from the corrective amendment must separately satisfy section 401(a)(4) for the preceding plan year and must benefit a group of employees that separately satisfies section 410(b) (determined by applying the same rules as are applied in determining whether a component plan separately satisfies section 410(b) under § 1.401(a)(4)-9(c)(4)). Thus, for example, in applying the rules of this paragraph (g)(3)(v), an employer may not aggregate the additional accruals or allocations for the preceding plan year resulting from the corrective amendment with the other accruals or allocations already provided under the terms of the plan as in effect during the preceding plan year without regard to the corrective amendment.

since all terminees were provided that would seem to satisfy 410(b), but does it separately satisfy 401(a)(4) as well? e.g. there was nothing to indicate if this was comp to comp or cross tested.

This is a CT plan with each person in their own group.  My understanding is that the new accrual that is provided by the amendment has to be tested by itself for 401(a)(4).  

This is complicated. RLR tells us that we are not dealing with just 1 HCE, but rather there are "a few NHCEs" as well.

So first, if the plan passes 401(a)(4) and 410(b) without the amendment, by simply applying the last day requirement, is the amendment "corrective" at all? Arguably not, but 1.401(a)(4)-11(g), as far as I can tell, does not define "corrective," so let's let that one go for sake of argument. (If the amendment only benefits folks and otherwise meets the requirements of 11(g), I would feel pretty comfortable with it even if arguably it is not "correcting" anything that needs to be corrective.) The second question is, which set of "requirements" do we test the "corrective" amendment under? The 1.401(a)(4)-11(g)(3)(v)(A) requirements for "coverage or amounts testing?"  The 1.401(a)(4)-11(g)(3)(v)(B) requirements for satisfying a safe harbor? Or the the 1.401(a)(4)-11(g)(3)(vi) requirements for BRF? We have to choose one of those sets of requirements, right? I would assume it would be the "coverage or amounts testing" set of requirements. If so, then the additional allocations resulting from the amendment need to satisfy 401(a)(4) and 410(b) as if they were the only allocations.

9 hours ago, Mike Preston said:

I know we are both preaching from the same pulpit. Maybe I've just recently been burned by actual numbers when any reasonable interpretation of the description would be harmless.  Bottom line for me is: pretend I'm from Missouri.

No problem; and well understood.  We should probably ask the original poster how many OTHER NHCEs will be brought in with the one HCE. 

So, RLR: can you provide that info?

9 minutes ago, Luke Bailey said:

This is complicated. RLR tells us that we are not dealing with just 1 HCE, but rather there are "a few NHCEs" as well.

So first, if the plan passes 401(a)(4) and 410(b) without the amendment, by simply applying the last day requirement, is the amendment "corrective" at all? Arguably not, but 1.401(a)(4)-11(g), as far as I can tell, does not define "corrective," so let's let that one go for sake of argument. (If the amendment only benefits folks and otherwise meets the requirements of 11(g), I would feel pretty comfortable with it even if arguably it is not "correcting" anything that needs to be corrective.) The second question is, which set of "requirements" do we test the "corrective" amendment under? The 1.401(a)(4)-11(g)(3)(v)(A) requirements for "coverage or amounts testing?"  The 1.401(a)(4)-11(g)(3)(v)(B) requirements for satisfying a safe harbor? Or the the 1.401(a)(4)-11(g)(3)(vi) requirements for BRF? We have to choose one of those sets of requirements, right? I would assume it would be the "coverage or amounts testing" set of requirements. If so, then the additional allocations resulting from the amendment need to satisfy 401(a)(4) and 410(b) as if they were the only allocations.

Luke, trust us! It is well established that you don't have to prove that there is anything to correct in order to do an 11g amendment and the service has said this many times. The reason is that given the complexity of the rules, it is quite possible that on a given test for non-discrimination, it is quite possible that using different methodologies or allowed assumptions, you might pass.  The IRS recognizes that it is not possible or practical or cost effective to require every possible permutation to be run, thus, there is no requirement that you "prove" failure in order to do an 11g amendment. And as you found out yourself, a reading of the rules themselves do not require a proof of failure to meet the requirements of a valid 11g amendment.

We agree that the amendment must stand on its own to pass 401(a)(4) and 410(b) as if it were a component plan (a stand alone plan).

12 minutes ago, Larry Starr said:

No problem; and well understood.  We should probably ask the original poster how many OTHER NHCEs will be brought in with the one HCE. 

So, RLR: can you provide that info?

Mike and Tom P: Hmmmmm....

New example: If the -11g amendment to eliminate end of year employment brings in only one HCE because he is the only one (in a given year) that was excluded by that provision, does the amendment pass non-discrim (let's assume the base plan is a design based safe harbor PS plan with no bells and whistles, just to make the case clear)?

4 hours ago, RLR said:

This is a CT plan with each person in their own group.  My understanding is that the new accrual that is provided by the amendment has to be tested by itself for 401(a)(4).  

The amendment itself has to be non-discriminatory on its own, and the plan must still pass non-discrimin with the additional dollars added to the HCe.  

39 minutes ago, Luke Bailey said:

If so, then the additional allocations resulting from the amendment need to satisfy 401(a)(4) and 410(b) as if they were the only allocations.

Yup.

21 minutes ago, Larry Starr said:

New example: If the -11g amendment to eliminate end of year employment brings in only one HCE because he is the only one (in a given year) that was excluded by that provision, does the amendment pass non-discrim (let's assume the base plan is a design based safe harbor PS plan with no bells and whistles, just to make the case clear)?

It does not.

The other "gotcha" has to do with deduction timing for contributions made compliant via-11g amendments.

As i understand the original facts, the contribution originally made to the HCE was not permitted by the plan terms.  Allocations created after the plan year end via -11g amendment would NOT be deductible for the plan year they are allocated to.  Rather that contribution would be deductible in the year the amendment was executed (the following year).

An 11-g amendment is effective as of the first day of the plan year to which it pertains.  So why wouldn't a contribution allocated thereunder not be deductible for that plan year?  I think there is a reason why the latest date for the amendment is 9 1/2 months after PYE: tax form extensions.

I really appreciate all the replies.  There are 3 NHCE's who worked 1,000 hours but were not there the last day who will be brought into the plan.

17 minutes ago, RLR said:

I really appreciate all the replies.  There are 3 NHCE's who worked 1,000 hours but were not there the last day who will be brought into the plan.

Does 1 HCE and 3 NHCE's constitute a 410(b) group?

45 minutes ago, BG5150 said:

An 11-g amendment is effective as of the first day of the plan year to which it pertains.  So why wouldn't a contribution allocated thereunder not be deductible for that plan year?  I think there is a reason why the latest date for the amendment is 9 1/2 months after PYE: tax form extensions.

Because it isn't.  You think wrong.

So, any additions due to an 11-g amendment are not deductible for the plan year to which it pertains?  It's deductible in the year of deposit?

1 hour ago, QP_Guy said:

The other "gotcha" has to do with deduction timing for contributions made compliant via-11g amendments.

As i understand the original facts, the contribution originally made to the HCE was not permitted by the plan terms.  Allocations created after the plan year end via -11g amendment would NOT be deductible for the plan year they are allocated to.  Rather that contribution would be deductible in the year the amendment was executed (the following year).

The statement I made BOLD above is not correct; guaranteed. What do you base your belief on?

36 minutes ago, BG5150 said:

So, any additions due to an 11-g amendment are not deductible for the plan year to which it pertains?  It's deductible in the year of deposit?

Not so.

Trying to find citation that shows -11g additions are deductible so long as contributed by the due date of tax return plus extensions.

Here is the parallel issue for QNECs (from EOB):

4. QNECs must be made within 12 months after close of plan year. To be counted in the ADP test or ACP test for a plan year, QNECs must be contributed no later than 12 months after the close of the plan year for which they are allocated. This rule is found in Treas. Reg. §1.401(k)-2(a)(6)(i) (ADP test) and §1.401(m)-2(a)(6)(i) (ACP test). Usually, the employer will make the contribution sooner (i.e., the due date of its tax return for the year for which the QNECs are allocated) because it wants to deduct the contribution for the year for which the QNECs are allocated.

QNEC provisions are baked into the document before the last day of the fiscal year so they are not in any way comparable to corrective allocations pursuant to an -11(g) amendment. Why do you need a citation that says the obvious?  Or if a flip answer doesn't warm the cockles of your heart, try 1.401(a)(4)-11(g)(5):

(5)Effect under other statutory requirements. A corrective amendment under this paragraph (g) is treated as if it were adopted and effective as of the first day of the plan year only for the specific purposes described in this paragraph (g). Thus, for example, the corrective amendment is taken into account not only for purposes of sections 401(a)(4) and 410(b), but also for purposes of determining whether the plan satisfies sections 401(l). By contrast, the amendment is not given retroactive effect for purposes of section 404 (deductions for employer contributions) or section 412 (minimum funding standards), unless otherwise provided for in rules applicable to those sections.

But while we are discussing angels, dancing and pins there is an (overly aggressive, in my view) interpretation of the above that will typically satisfy both definitions.  While the -11(g) amendment can't be used to modify the otherwise determined deductible limit of 404, the contributions made pursuant to the -11(g) amendment can be deducted as long as they don't cause an aggregate deduction to exceed that otherwise determined deductible limit of 404.  That leaves your only hurdle as 404(a)(6).  Got any workarounds for 404(a)(6)?

Thanks, Larry.

I thought about this some more.

the whole thing smells. and smells real bad.

oh, an owner quit and now we want to retroactively amend the document to conform what took place in which the owner was 'accidently' provided a contribution.

The  company doesn't  run the  cross testing, it is the TPA or whomever, and apparently it was discovered that the owner won't get anything, so now lets go ahead and give him something. (instead of rerunning the test how it should.)

and let's call it a correction under -11g and to be fair we will give to the nhce terminees as well. we never gave terminated NHCEs in the past, but then we never had a terminated owner either.

arguing they can pass all the mathematical testing reminds me of the comment made by the IRS in regards to cross testing in general

Although these designs may allow the plan to satisfy the vesting or numeric general tests for nondiscrimination and the associated regulations, they don’t satisfy Treas. Reg. Section 1.401(a)(4)-1(c)(2), which requires that the provisions of Sections 1.401(a)(4)-1 through 1.401(a)(4)-13 be reasonably interpreted to prevent discrimination in favor of HCEs. 

so is it a reasonable interpretation to say this flies? lets see, we give an owner $40,000 or whatever and give terminees who probably have minimal comp a 5% contribution and because mathematically it works out, it is ok.

dang, might as well have a document that reads

in no year terminees will receive except in a year in which it is an owner and then all terminees receive. (Could you at least have said, oh I didn't see that the owner is past NRA and those folks do actually get a contribution)

bet you would have problems getting that document approved.

or taking it a step further if it was a MP plan at 5% would you say it is ok to retroactively amend to 10% to all and call it a corrective amendment because that is how we ran the allocation?

20 hours ago, Mike Preston said:

QNEC provisions are baked into the document before the last day of the fiscal year so they are not in any way comparable to corrective allocations pursuant to an -11(g) amendment. Why do you need a citation that says the obvious?  Or if a flip answer doesn't warm the cockles of your heart, try 1.401(a)(4)-11(g)(5):

(5)Effect under other statutory requirements. A corrective amendment under this paragraph (g) is treated as if it were adopted and effective as of the first day of the plan year only for the specific purposes described in this paragraph (g). Thus, for example, the corrective amendment is taken into account not only for purposes of sections 401(a)(4) and 410(b), but also for purposes of determining whether the plan satisfies sections 401(l). By contrast, the amendment is not given retroactive effect for purposes of section 404 (deductions for employer contributions) or section 412 (minimum funding standards), unless otherwise provided for in rules applicable to those sections.

Whew! That's a load of my mind. I'm glad that's your citation, because that is exactly saying what I'm saying. 

The -11g amendment allows for the additional funds to be deducted in the prior year tax return. Now, to accomplish that, you still have to comply with either 404 or 412.  So for a PS plan (401(k) plan), you have to make the contribution within the due date of the tax return plus extensions.  If you are not on extension, making the  -11g amendment AFTER 3/15 (4/15) does not allow for the deduction in the prior year EVEN though it is allowed to be effective for the prior year for the other purposes noted.  If it is subject to minimum funding, you have the 2 1/2 month rule in order to have it effective for deduction purposes for the prior year and the election that is attached to the 5500 under 412(c)(8).

But other than that, a -11g amendment done after the year end for a DC plan is deductible if done and funded prior to the extended due date of the applicable return.

1 hour ago, Tom Poje said:

I thought about this some more.

the whole thing smells. and smells real bad.

oh, an owner quit and now we want to retroactively amend the document to conform what took place in which the owner was 'accidently' provided a contribution.

The  company doesn't  run the  cross testing, it is the TPA or whomever, and apparently it was discovered that the owner won't get anything, so now lets go ahead and give him something. (instead of rerunning the test how it should.)

and let's call it a correction under -11g and to be fair we will give to the nhce terminees as well. we never gave terminated NHCEs in the past, but then we never had a terminated owner either.

arguing they can pass all the mathematical testing reminds me of the comment made by the IRS in regards to cross testing in general

Although these designs may allow the plan to satisfy the vesting or numeric general tests for nondiscrimination and the associated regulations, they don’t satisfy Treas. Reg. Section 1.401(a)(4)-1(c)(2), which requires that the provisions of Sections 1.401(a)(4)-1 through 1.401(a)(4)-13 be reasonably interpreted to prevent discrimination in favor of HCEs. 

so is it a reasonable interpretation to say this flies? lets see, we give an owner $40,000 or whatever and give terminees who probably have minimal comp a 5% contribution and because mathematically it works out, it is ok.

 

dang, might as well have a document that reads

in no year terminees will receive except in a year in which it is an owner and then all terminees receive. (Could you at least have said, oh I didn't see that the owner is past NRA and those folks do actually get a contribution)

bet you would have problems getting that document approved.

or taking it a step further if it was a MP plan at 5% would you say it is ok to retroactively amend to 10% to all and call it a corrective amendment because that is how we ran the allocation?

Tom,

I do think you are overthinking it. But I do believe that the allocation done that included the HCE who was not entitled to that allocation needs to be re-run and the full amount allocated without him in it since it appears those funds were contributed prior to the year end.  Those funds belong to those who were entitled to the allocation of the plan contribution as of the year end.

The -11g amendment has to be an ADDITIONAL amount of money, for the HCE and all the other terminated employees now included.

And yes, I have no problem with bringing EVERYONE in and then giving the appropriate amount of money so the plan passes all the tests, now including the additional folk.  That's why the IRS wrote those 800  pages of regulations and if this passes, it passes.  It clearly (to me) is NOT discrimination in favor of the HCE when they amend to give the money to everyone.  It is no different than if the plan had been amended on 12/30 to eliminate the end of year provision, held off its contribution until after 12/31, figured out what had to be contributed INCLUDING any -11g amendment in case the plan was cross tested, and then adopted the amendment and contributed the funds.

On your MP example, how they ran a wrong allocation at 10% is immaterial. They found out it should be 5%, they want it to be 10%, now they don't need to do an -11g amendment because they can adopt an amendment within 2 1/2 months and give it retroactive effect under 412(c)(8) for deduction purposes.   A -11g amendment doesn't give a MP plan retroactive increase in minimum funding if done after 2 1/2 months.

1 hour ago, Tom Poje said:

I thought about this some more.

the whole thing smells. and smells real bad.

Nobody has discussed making the design changes described in the -11(g) amendment permanent or not. I would resist any further expansion of -1(c)(2) in the absence of, at the least, an informal announcement from the IRS. Where do you draw the line, Tom?  Couldn't you use that same provision to diminish the effectiveness of ANY design that is on the wrong side of a pro-rata allocation formula? I would argue that there are certain things that are very much intended to be measured by the mathematical formulas of the regulation.  And treating a contribution to an historically walled off class of employees (those who terminate before the end of the year) as subject to those formulas is one.

32 minutes ago, Larry Starr said:

Whew! That's a load of my mind. I'm glad that's your citation, because that is exactly saying what I'm saying. 

Assuming we adopt the view that I've already described as over-aggressive, how do you get around 404(a)(6)?

55 minutes ago, Mike Preston said:

Assuming we adopt the view that I've already described as over-aggressive, how do you get around 404(a)(6)?

What exactly is your concern.  My 404(a)(6) says this:

(6)Time when contributions deemed made

1 hour ago, Mike Preston said:

Assuming we adopt the view that I've already described as over-aggressive, how do you get around 404(a)(6)?

BTW, I really don't think it is over aggressive. Really.

404(a)(6) has always been interpreted literally as to the terms of the plan.  To the extent there have been carve outs to that definition they have been explicit (hence 412(c)(8) you previously cited.  There is no such nexus between 404(a)(6) and an -11(g) amendment that I'm aware of.

I guess we are just going to have to disagree that the language of 404(a)(6) you are hanging your hat on ["unless otherwise provided for in rules applicable to those sections."] has any applicability to -11(g).  It doesn't.  

Thanks to everyone who have taken the time to reply to this topic - it has been very helpful!  

http://www.asppa.org/Portals/2/Workshop 01.Pension Deductions - Not for the Faint of Heart.pdf

See pages 47 and 48

I also saw a Relius tease for a workshop that supposedly addressed the following:

"In which tax year are the contributions made with respect to a retroactive corrective amendment deductible?"

which may be instructional:

http://www.relius.net/news/TechnicalUpdateDetails.aspx?T=&1=1&ID=971

On 6/9/2018 at 11:40 PM, Mike Preston said:

http://www.asppa.org/Portals/2/Workshop 01.Pension Deductions - Not for the Faint of Heart.pdf

See pages 47 and 48

I also saw a Relius tease for a workshop that supposedly addressed the following:

"In which tax year are the contributions made with respect to a retroactive corrective amendment deductible?"

which may be instructional:

http://www.relius.net/news/TechnicalUpdateDetails.aspx?T=&1=1&ID=971

Hmmmm..  on page 48, Kevin left out the important part of that reg (as I see it).  See my prior discussion.

The Relius tease was from 2013 and only raises the question but doesn't provide and useful discussion.

Yes, but I thought with your Relius connections you can burrow beneath the tease and see what they said in the presentation being teased.

1 hour ago, Mike Preston said:

Yes, but I thought with your Relius connections you can burrow beneath the tease and see what they said in the presentation being teased.

I'll give it the old college try.. tomorrow.

BTW: Yesterday we were in NYC for a Tony Party.  My show WON THE FRIGGIN BEST MUSICAL REVIVAL!!!!!!!! Got home at 3:30 this morning and had a dental appt at 7:30!

Once On This Island.

Congrats!  They need to bring back NPH as host.  Josh and Sara are just too bland.  Either that, or DeNiro should host.  That would generate some buzz.