Use cross tested formula when document calls for integrated

I have a client whose plan document states the profit sharing formula is integrated with SSTWB at 100%. They have not done a profit sharing contribution in the past and have decided they want to do one for 2019. There is no one with compensation in excess of the SSTWB. Could we do the profit sharing using a cross tested formula with everyone in their own groups as long as we pass ABT? I don't think we can, but I wanted to check to be sure. Thanks.

Just now, Cheryl S said:

I have a client whose plan document states the profit sharing formula is integrated with SSTWB at 100%. They have not done a profit sharing contribution in the past and have decided they want to do one for 2019. There is no one with compensation in excess of the SSTWB. Could we do the profit sharing using a cross tested formula with everyone in their own groups as long as we pass ABT? I don't think we can, but I wanted to check to be sure. Thanks.

Huh???  I don't understand what you are talking about doing. 

You are talking about a 2019 plan year (that's given).

You are talking about a plan (is it just a profit sharing plan?) that has an integration level of the taxable wage base for 2019 ($132,900), right?

No employee has a compensation in excess of the TWB (that's given).

That means you have a plan that is NOT a cross tested formula for 2019, and any allocation of PS contribution would be allocated pro rata on compensation.

What is your question now?  You can't retroactively change to a plan that puts each employee into their own group; you have to follow the allocation provisions in effect as of 12/31/19.

Do does handle what you are trying to do here?

Yes, that does. Thank You!

What about an 11(g) amendment?  May not get you all the way there (depending on how conservative you want to be), but it might fit.  Have to be careful about deduction years  [Larry and I might disagree on how that works].

19 hours ago, Mike Preston said:

What about an 11(g) amendment?  May not get you all the way there (depending on how conservative you want to be), but it might fit.  Have to be careful about deduction years  [Larry and I might disagree on how that works].

Interesting... not something I didn't consider but then decided not to include it in my response.  Given the nature of the question, I surmised it might be more complicated than these parties would want to handle.  It will be a bit tricky, and I think we still are not really in agreement about the deductibility, so I figured no sense bringing it up.

Then you go and screw around with my whole thought process.... ? 

The situation under discussion is almost an exact match to the situation in TAM 9735001, which says amending the allocation formula after the end of the plan year would violate 411(d)(6) if anyone receives less under the new formula than they would have received under the old.  It also says a formula change after the end of the plan year is analogous to a change in the conditions for receiving an allocation after they have been satisfied that also violates 411(d)(6). 

1 hour ago, Larry Starr said:

Interesting... not something I didn't consider but then decided not to include it in my response.  Given the nature of the question, I surmised it might be more complicated than these parties would want to handle.  It will be a bit tricky, and I think we still are not really in agreement about the deductibility, so I figured no sense bringing it up.

Then you go and screw around with my whole thought process.... ? 

We aim to please!

46 minutes ago, Kevin C said:

The situation under discussion is almost an exact match to the situation in TAM 9735001, which says amending the allocation formula after the end of the plan year would violate 411(d)(6) if anyone receives less under the new formula than they would have received under the old.  It also says a formula change after the end of the plan year is analogous to a change in the conditions for receiving an allocation after they have been satisfied that also violates 411(d)(6). 

I think "97" pre-dates the publication of a4 regs.  The IRS could have hung 411(d)(6) requirements on 11(g) amendments.  They didn't. Under the above interpretation there is no such thing as an 11(g) amendment and that can't be right.

1 hour ago, Mike Preston said:

I think "97" pre-dates the publication of a4 regs.  The IRS could have hung 411(d)(6) requirements on 11(g) amendments.  They didn't. Under the above interpretation there is no such thing as an 11(g) amendment and that can't be right.

Our reference source has the a4 regs tagged as published 9/3/93.  The following language was in the regs published 9/3/93.

Quote

1.401(a)(4)-11(g)(3)(ii) Benefits not reduced. Except as permitted under paragraph (g)(3)(vi)(C)(2) of this section, the corrective amendment may not result in a reduction of an employee's benefits (including any benefit, right, or feature), determined based on the terms of the plan in effect immediately before the amendment.

The exception listed includes the language "(to the extent permitted under section 411(d)(6)) ". 

I thought the typical 11(g) situation was that an allocation is done under the existing terms of the document, it fails testing and the 11(g) amendment gives additional benefits to NHCEs sufficient to pass the testing?  I don't see anything in the TAM that conflicts with that. The TAM addresses replacing an allocation formula after the end of the plan year, not adding additional benefits to it.

All 11(g) amendments are, by definition, additive.  They are, by definition, on top of and independent (other than the requirement that the sum of the "regular" and 11(g) amendments satisfy a(4)) of the "regular" allocation.  There is no requirement that the regular allocation fail testing, in any way.  How low do you want to go?  That is, can an 11(g) amendment be scripted that essentially adds a non-discriminatory allocation on top of a zero regular allocation?  Zero too low for you?  Where do you draw the line? I think being deductible with other contributions for the subsequent year dovetails nicely (Larry thinks, I think, that current year deductibility is even allowed.)   There must be a gazillion threads on this issue over the many years that 11(g) has been on the books.  I'm not going to re-hash them here.  Either one believes the regular allocation must fail a4 to use an 11(g) or they don't.  I don't.

Thanks everyone for your comments and research. 

I agree with you that a testing failure is not required to be able to do an 11(g) amendment.  After a discussion a few years back, I found the preamble to the regs that added 11(g) where it specifically says a testing failure is not required. 

I don't know where you draw the line, either.  Yes, zero is too low for me.  I think a conservative approach would be to give the HCEs the desired allocation under the current formula, with the NHCEs getting what the document says they get, and then add on the 11(g) amendment.  The line may be somewhere in between.  I wouldn't want to be a test case.  Of course, put everyone in their own allocation group before anyone is eligible for the contribution for that plan year and it's a non-issue going forward.

The question really boils down to what is protected by 411(d)(6).  If an 11(g) amendment can have the effect of completely replacing the allocation method after the end of the plan year, then 411(d)(6) is meaningless.

It is not meaningless. There are significant, but subtle differences.

14 hours ago, Mike Preston said:

All 11(g) amendments are, by definition, additive.  They are, by definition, on top of and independent (other than the requirement that the sum of the "regular" and 11(g) amendments satisfy a(4)) of the "regular" allocation.  There is no requirement that the regular allocation fail testing, in any way.  How low do you want to go?  That is, can an 11(g) amendment be scripted that essentially adds a non-discriminatory allocation on top of a zero regular allocation?  Zero too low for you?  Where do you draw the line? I think being deductible with other contributions for the subsequent year dovetails nicely (Larry thinks, I think, that current year deductibility is even allowed.)   There must be a gazillion threads on this issue over the many years that 11(g) has been on the books.  I'm not going to re-hash them here.  Either one believes the regular allocation must fail a4 to use an 11(g) or they don't.  I don't.

Mike and I agree that the original allocation does not need to "fail" a4 in order to use 11(g).  I think every knowledgeable practitioner agrees with that; I didn't know there were still people who thought otherwise. BTW, the IRS in ASPPA Q&A Sessions from years ago agreed as well. Remember, even if you do "fail" on your usual testing methodology, there are so many alternative testing options that maybe you would not fail if you used them; I believe IRS recognized the impracticability of having to PROVE every possible option was examined and failed in order to use 11(g).  Therefore, no requirement to fail in order to use 11(g).

Now, I have also thought (in this case, but decided not to cover it until Mike opened the door..... SHEESH!) that maybe a 1% pre 11(g) contribution allocated across the board might be one route, followed by an 11(g) that added all the additional monies to the individual participants as decided by the employer. Since we were told there were no HCEs involved, the 11(g) will meet the requirements for non-discrimination on its own that is in the regs.  Could that work for this situation?  If it was my client, I might very well try it.

But, as we have noted, this is NOT a retroactive amendment to add grouping; it is a different methodology that might get the same result that the client was looking for.

FWIW. 

1 hour ago, Mike Preston said:

It is not meaningless. There are significant, but subtle differences.

Not meaningless, but effectively, with just a little bit of attention, almost trivial and not restrictive.  Boy, I really didn't want to get into this, but there you are......

Larry,  do you have inside information?  All I see is that no one has comp over the TWB in 2019, not that there are no HCEs.

20 minutes ago, Kevin C said:

Larry,  do you have inside information?  All I see is that no one has comp over the TWB in 2019, not that there are no HCEs.

I don't think having HCE's creates a substantive difference. To satisfy 11(g) the 11(g) allocation, alone, must satisfy a4. Also, the sum of the 11(g) and the otherwise existing allocation must satisfy a4.  If the otherwise existing allocation is a flat percentage of pay, designing an 11(g) amendment that satisfies a4 on its own yet fails the requirement to satisfy a4 based on the sum of the two is going to be very, very difficult.

2 hours ago, Kevin C said:

Larry,  do you have inside information?  All I see is that no one has comp over the TWB in 2019, not that there are no HCEs.

Oops!  Went back and re-read; agreed, we don't know about HCEs (though probably any that exist are by ownership).

1 hour ago, Mike Preston said:

I don't think having HCE's creates a substantive difference. To satisfy 11(g) the 11(g) allocation, alone, must satisfy a4. Also, the sum of the 11(g) and the otherwise existing allocation must satisfy a4.  If the otherwise existing allocation is a flat percentage of pay, designing an 11(g) amendment that satisfies a4 on its own yet fails the requirement to satisfy a4 based on the sum of the two is going to be very, very difficult.

Agreed. Since we don't have any idea what they actually want to do with regard to allocations to HCEs (I would have asked that if I had actually intended to talk about -11g's, but of course I didn't plan on that until Mike etc etc etc....), I'm going to assume the -11g lists only NHCEs for allocations.  If the -11g includes HCEs, then it will have to pass a4 as a stand alone.  That may limit what HCEs can get in the -11g IF the intent was to give HCEs bigger numbers than a standard SS integrated plan would provide (actually, in this case because of the comps involved, a standard non-integrated PS plan). 

Maybe you can explain something to me, because I don't see how you do this without it being a cutback.

Say the plan covers 10 employees, each of them has comp of $100,000. On the last day of 2019, the plan's allocation formula states that each participant is entitled to a pro rata share of the employer contribution. The employer makes a discretionary contribution for 2019 of $10,000, so under the plan's formula, each employee is entitled to $1,000 of the contribution.

After the end of the year, they adopt an amendment to retroactively grant employee Q an additional $5,000 (let's assume coverage and nondiscrimination are satisfied - it's not relevant for my question). What you are saying, as I understand it, is that because there was an employer contribution allocated under the original formula, you can use an -11(g) amendment to "add on" an additional contribution under a completely different formula.

The way I'm looking at it, the employer contribution for 2019 is now $15,000. Under the formula in effect on the last day of the plan year, each employee is entitled to $1,500 of the contribution. Under the amended formula, Q is entitled to $6,000 and all other participants are entitled to $1,000. Therefore the amended formula is a cutback for everyone other than Q, and is not permissible. The fact that the employer would not have made the additional $5,000 contribution if not for the amendment is irrelevant (see the 3rd to last paragraph of TAM 9735001).

I'm not sure what you are looking for. One is a discretionary amendment essentially authorized via 87-44 which, as you note has 411d6 protection. The other is an 11(g) amendment that has a completely different 411d6 context.  Sort of like the first one is an 87-44 amendment and the other would be a brand new plan which I hope you agree doesn't have any restriction to the allocation formula because of the existence of the first plan. 

9 hours ago, Mike Preston said:

and the other would be a brand new plan

...which, I think, brings up the issue of deductibility (in 2019 or 2020).  Not claiming any insight other than I remember someone saying such contributions are deductible in the year the amendment is drafted, not the prior year, and it makes sense to me.  (And it was in fact referenced in this thread.)

Interesting too that this problem more-or-less goes away with the ability to just draft a brand new plan retroactively effective in 2020.

Mike, I don't understand where you are trying to go with this.  One requirement for an 11(g) amendment is that "... the corrective amendment may not result in a reduction of an employee's benefits (including any benefit, right, or feature), determined based on the terms of the plan in effect immediately before the amendment. " [1.401(a)(4)-11(g)(3)(ii)]  How is that completely different than the way 411(d)(6) applies to any other amendment? 

I still don't know where you draw the line on 11(g) amendments, but I think it is somewhere between wholesale retroactive replacement of the allocation method (the TAM situation) and adding a new allocation class or two to an existing plan.  With the OP situation, I still think the TAM is pretty clear that it can't be done.  I would amend for 2020 and go on. 

They are different paths.  One is precluded.  The other is specifically authorized. If knowing that doesn't give you comfort, so be it.

6 hours ago, Kevin C said:

Mike, I don't understand where you are trying to go with this.  One requirement for an 11(g) amendment is that "... the corrective amendment may not result in a reduction of an employee's benefits (including any benefit, right, or feature), determined based on the terms of the plan in effect immediately before the amendment. " [1.401(a)(4)-11(g)(3)(ii)]  How is that completely different than the way 411(d)(6) applies to any other amendment? 

I still don't know where you draw the line on 11(g) amendments, but I think it is somewhere between wholesale retroactive replacement of the allocation method (the TAM situation) and adding a new allocation class or two to an existing plan.  With the OP situation, I still think the TAM is pretty clear that it can't be done.  I would amend for 2020 and go on. 

Kevin, you need to drop this argument. We know it is not correct and the IRS knows it doesn't work that way.  When you make a contribution under the terms of an -11g amendment, it is not considered a contribution that was subject to the plan's allocation scheme. That's the way it is; accept it and "don't worry; be happy".

Can you enlighten me as to what 87-44 refers to? I can't find anything related to qualified plans under that number.

Maybe I've got the cite wrong.  Discretionary amendment timing. Try 2007-44.

On 1/17/2020 at 5:00 PM, Larry Starr said:

Kevin, you need to drop this argument. We know it is not correct and the IRS knows it doesn't work that way.  When you make a contribution under the terms of an -11g amendment, it is not considered a contribution that was subject to the plan's allocation scheme. That's the way it is; accept it and "don't worry; be happy".

Wait a sec Larry, are you saying it isn't at least "aggressive" to say "we're allocating $100 under the existing formula, and amending the plan under -11g to add a new contribution of $50,000 allocated as follows?"

4 hours ago, Bird said:

Wait a sec Larry, are you saying it isn't at least "aggressive" to say "we're allocating $100 under the existing formula, and amending the plan under -11g to add a new contribution of $50,000 allocated as follows?"

There is a catch-all provision in the regs that says the IRS always has the ability to classify something as discriminatory on a facts and circumstances basis. 1.401(a)(4)-5(a)(2).

But since, by definition, the -11g amendment has to be non-discriminatory standing on its own, I'm not sure this would be the way to challenge this.  In our discussions with IRS (that I was involved in), they never brought this issue up, fwiw.  

So, yes, I think it isn't "aggressive" because there is nothing that I can find that would suggest you can't do that. 

FWIW, we have never had to do it that way, and that is probably why I was originally NOT going to bring this up, but then Mike etc etc etc!

On ‎1‎/‎17‎/‎2020 at 4:00 PM, Larry Starr said:

Kevin, you need to drop this argument. We know it is not correct and the IRS knows it doesn't work that way.  When you make a contribution under the terms of an -11g amendment, it is not considered a contribution that was subject to the plan's allocation scheme. That's the way it is; accept it and "don't worry; be happy".

Which argument?  That a retroactive -11(g) amendment must comply with 411(d)(6)?  Or, that the IRS position in TAM 9735001 is that a retroactive amendment under the circumstances listed in the TAM violates 411(d)(6)?

You and Mike are reading things into my comments that are not there.  What I'm saying is that the retroactive amendment described in the OP is very close to the situation in the TAM that the IRS says violates 411(d)(6).  If you want an -11(g) amendment to be retroactive, it can't violate 411(d)(6) [1.401(a)4)-11(g)(3)(i) & (ii)].  I don't see the IRS conclusion in the TAM changing just because the employer tries to call it an -11(g) amendment. The only retroactive amendment discussed in this thread that I've said I think would violate 411(d)(6) is the one in the OP.  Mike asked me where the line should be drawn. I don't know, but I think it is somewhere before you get to a complete replacement of the existing allocation formula like the situation in the TAM.   That still leaves plenty of room for -11(g) amendments.

5 hours ago, Kevin C said:

Which argument?  That a retroactive -11(g) amendment must comply with 411(d)(6)?  Or, that the IRS position in TAM 9735001 is that a retroactive amendment under the circumstances listed in the TAM violates 411(d)(6)?

You and Mike are reading things into my comments that are not there.  What I'm saying is that the retroactive amendment described in the OP is very close to the situation in the TAM that the IRS says violates 411(d)(6).  If you want an -11(g) amendment to be retroactive, it can't violate 411(d)(6) [1.401(a)4)-11(g)(3)(i) & (ii)].  I don't see the IRS conclusion in the TAM changing just because the employer tries to call it an -11(g) amendment. The only retroactive amendment discussed in this thread that I've said I think would violate 411(d)(6) is the one in the OP.  Mike asked me where the line should be drawn. I don't know, but I think it is somewhere before you get to a complete replacement of the existing allocation formula like the situation in the TAM.   That still leaves plenty of room for -11(g) amendments.

 

I went back to the TAM and I don't see anything that is remotely relevent to 411(d)(6) attaching in the 11g rubrick. Note that the TAM includes the following:

"Section 404(a)(6) allows a contribution made after the end of the employer's taxable year, but before the due date of the employer's return, to be treated as made on the last day of the preceding taxable year if the contribution is made on account of the preceding year. Rev. Rul. 76-28, 1976-1 C.B. 106 and Rev. Rul. 90-105, 1990-2 C.B. 69 provide that a contribution made after the close of an employer's taxable year will be deemed to have been made on account of the preceding taxable year under section 404(a)(6) if, among other conditions, the contribution is treated by the plan in the same manner as the plan would treat a contribution actually received on the last day of the preceding taxable year."

In my world (maybe not Larry's) an 11(g) contribution is not deductible in the preceding taxable year.  Everything you are worried about melts away in that case.  There is a reason that 11g amendments are specifically authorized retroactive treatment only for a4 purposes and not 404a6 purposes.

Larry won't like this line of reasoning.

13 hours ago, Mike Preston said:

 

Larry won't like this line of reasoning.

Not true; he will just ignore it.... ?