When does a plan need to be amended for EGTRRA?
Under Notice 2001-42, an employer need not amend its plan for EGTRRA until the end of the 2002 plan year, or if later, by the end of the GUST remedial amendment period. Under the latest IRS extension of the remedial amendment period applicable to certain prototype and volume submitter plans (Rev. Proc. 2002-73), the remedial amendment period is extended at least until September 30, 2003. However, Notice 2001-42 also indicates that EGTRRA did not include any exceptions to the anti-cutback rules of Code §411(d)(6). Thus, if an employer does not amend its plan for EGTRRA until the end of its 2002 plan year (or later), the Employer must ensure that there are no prohibited cutbacks of benefits.
When have benefits accrued?
There is little IRS guidance regarding when a benefit accrues and becomes protected by the anti-cutback rules. Under Technical Advice Memorandum (TAM) 9735001, a participant has accrued a benefit or allocation once all conditions for sharing in, or receiving, a contribution or benefit have been satisfied. At that point, an amendment changing a benefit or allocation formula retroactively would violate Code §411(d)(6).
For example, suppose participants in a profit sharing plan are eligible to share in any employer discretionary profit sharing contribution if they are employed at the end of the plan year or have terminated employment with over 500 hours of service. Once a participant has over 500 hours of service, he or she will be eligible to share in the allocation of any employer profit sharing contribution for the year. Although the employer retains discretion as to whether (and how much) to contribute, under TAM 9735001, the Employer may not amend retroactively the plan’s allocation formula (e.g., from an allocation based pro-rata on compensation to an allocation using permitted disparity) for a particular plan year once participants have earned over 500 hours of service in that plan year. A change in the formula will result in some participants receiving a smaller share of the contribution. This is the case even though the plan provides for discretionary contributions and no participant is entitled to any allocation unless and until the employer decides to make a contribution.
Alternatively, if a plan provides that no participant is eligible to share in an allocation unless the participant is employed at the end of the plan year, then the allocation formula could be amended up until prior to the last day of the plan year. In this case, no participant would have earned the right to share in the contribution until the last day of the plan year.
Note that the same issue could arise with respect to allocation of a discretionary match.
What does this have to do with EGTRRA?
There are at least two provisions of EGTRRA that are of concern to practitioners because of the anti-cutback rules.
1. Top-heavy provisions. EGTRRA made numerous changes to the top-heavy rules (e.g., in determining top-heavy status, who are the key-employees, and top-heavy minimums). It is possible that a top-heavy plan will no longer be top-heavy under the EGTRRA rules. If an employer amends its top-heavy plan for EGTRRA after a top-heavy minimum benefit has accrued and the amendment results in the plan no longer being top-heavy, an impermissible cutback would result. The non-key employees would lose an accrued top-heavy minimum benefit.
For defined contribution plans, a participant is entitled to the top-heavy minimum only if the participant is employed at the end of the plan year. Therefore, for 2002, the EGTRRA amendment changing the top-heavy provisions can be made up to the day before the last day of the 2002 plan year. However, if the employer amends for EGTRRA after the end of the 2002 plan year (even if within the remedial amendment period), an impermissible cutback may result.
For defined benefit plans, a participant is entitled to the top-heavy minimum accrual if the participant has completed 1,000 hours of service (assuming the plan is not using the elapsed time method of crediting service). Therefore, an employer generally only can make the EGTRRA amendment changing the top-heavy provisions prior to the time a non-key participant is credited with 1,000 hours of service. However, in Notice 2001-42 the IRS provided a limited exception to this rule. Defined benefit plans may amend for EGTRRA by May 31, 2002 (or March 31, 2002, if the plan uses the elapsed time method of crediting service for accrual purposes) without violating the anti-cutback rules.
2. Increase in compensation limit to $200,000. If a plan is amended to take into account the increase in the annual compensation limit to $200,000, it is possible that some participants will receive a smaller share of any employer contribution. For example, if a profit sharing plan allocates contributions pro-rata based on compensation and assuming the employer does not contribute more to the plan, then increasing the amount of compensation taken into account for some participants (increasing their allocations) necessarily will reduce the allocations to the other participants. As discussed above, if the amendment to increase the compensation limit is made after some participants have earned the right to share under the allocation formula, then the IRS position is that the amendment cannot be made retroactive for that year.
So what action should an employer take?
An employer should adopt its EGTRRA amendment in 2002 prior to the date that benefits accrue under the plan terms. Although the employer may have a longer period to adopt the EGTRRA amendment under the plan’s GUST remedial amendment period, impermissible cutbacks may result if the employer delays its EGTRRA amendment.
Where can I obtain the EGTRRA amendment if I need to update a previously prepared GUST document or for a plan that will be updated for GUST at a later date?
A sample EGTRRA amendment is located in our Other Resources section.