The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor in Tennessee is representative of a common inquiry related to plan contributions. The advisor asked:
“My client wants to amend his 401(k) plan to add a last day requirement to receive a profit sharing contribution for the current plan year. Right now the contribution is discretionary and there is no service or last day requirement to receive the contribution. Can he make that change before year end?”
Highlights of the Discussion
The IRS has taken the position that the right to receive a contribution under a defined contribution plan’s existing allocation formula is protected once the participant has satisfied the plan’s allocation conditions [Technical Advice Memorandum (TAM) 9735001]. If participants in the plan have already accrued a right to receive an allocation – even though the contribution may be discretionary – the contribution cannot be taken away.
A plan amendment cannot decrease the accrued benefit of any plan participant [IRC § 411(d)(6)(A)]. These anti-cutback rules only protect benefits that accrue prior to the amendment date [Treas. Reg. § 1.411(d)-3(b)(3)].
In the question at hand, since there are no requirements to receive the profit sharing contribution, anyone who has completed an hour of service for the year has accrued a right to any profit sharing allocation the sponsor may or may not make for the year.
In contrast, let’s say the plan had a 1,000 hour of service requirement to receive a discretionary profit sharing contribution and the plan sponsor wanted to add a last day requirement. In that case, the plan sponsor could amend the plan to add the last day up to the point that someone completes 1,000 hours of service – which could be mid-year, based on 2,080 hours worked in a full year.
Similarly, suppose the plan required 501 hours of service to receive a contribution. The sponsor would only be able to change the allocation method up until the date on which the first participant works his/her 501st hour for the year. After that point, changing the method would eliminate a right the participant has already earned according to TAM 9735001.
Of course, a plan sponsor has the right to amend the plan’s contribution formulas on a prospective basis.
Conclusion
It’s always very important to be sure to check the plan document for contribution eligibility requirements. A plan amendment cannot decrease the accrued benefit of any plan participant. The right to receive a contribution under a defined contribution plan's existing allocation formula is protected once the participant has satisfied the plan's allocation conditions.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2019, Retirement Learning Center, LLC. Used with permission.
