Probably the most important tool in preventing a cross-tested plan from failing nondiscrimination testing is the retroactive corrective amendment (11(g) amendment) that a plan sponsor may adopt within 9½ months after the close of the plan year. Most cross-tested plans are designed to maximize disparity between the highly compensated employees (HCEs) and the nonhighly compensated employees (NHCEs) and a simple change in the plan’s demographics can transform a plan that was passing nondiscrimination into a plan that is not passing (e.g., replacement of a young NHCE with an older NHCE). Often times these demographic changes are not discovered until after the close of the plan year when the third party administrator (TPA) is performing some preliminary contribution calculations. The 11(g) amendment permits the plan to resolve the change at reasonable expense without having to correct the plan under EPCRS. The 11(g) amendment provides the plan sponsor with a lot of flexibility in resolving the failure but it does have some limitations that the plan must carefully follow. 

Does the plan actually have to fail nondiscrimination testing before the plan adopts an 11(g) amendment?  In other words, must the employer make the contribution, fail nondiscrimination testing and then adopt the amendment, or, can the employer amend the plan without failing the test first? 

No, the plan does not need to fail nondiscrimination testing before adopting an 11(g) amendment. The preamble to the 1991 Code 401(a)(4) regulations (Note: The IRS reissued the nondiscrimination regulations in 1993 but did not make changes to the rules regarding 11(g) amendments except to add a mechanism to correct a benefits, rights and features problem) states: “In order to permit employers to make practical choices based on administrative concerns, use of the retroactive correction period is not conditioned on a demonstration the plan actually failed to satisfy the nondiscrimination requirements. In addition, correction is not limited to amendments correcting disqualifying defects.” Accordingly, a plan sponsor could amend the plan to place certain highly or NHCEs in different classifications so that it doesn’t have to make as large of a contribution to the NHCEs to pass nondiscrimination. 

Example. Corporation X maintains a cross-tested profit sharing plan with two allocation groups (HCEs and NHCEs. For 2010 and 2011, the plan sponsor contributed 20% to the HCEs and the minimum gateway contribution (5%) to the NHCEs. However, because of some changes in employee make-up, the TPA has done some preliminary calculations and X would need to contribute 8% to all the NHCEs to pass nondiscrimination for 2012. Instead, X adopts an 11(g) amendment that places one of the NHCEs in separate allocation group and provides only that participant an 8% allocation and the other participants with the minimum gateway contributions, which proves to be enough to pass. 

What conditions must an 11(g) retroactive corrective amendment satisfy? 

An 11(g) amendment must satisfy the following conditions: 

1. The amendment may not reduce benefits (including any benefits, rights and features), determined on the basis of the plan terms in effect immediately prior to the amendment. However, see 5.b. below. 
2. The amendment must be effective as if the amendment had been made on the first day of the plan year being corrected. 
3. The amendment must be adopted by the 15th day of the tenth month after the close of the plan year being corrected. If the plan sponsor applies for a determination letter before the end of the 9½ month period, the retroactive correction period is extended in the same manner as the remedial amendment period. 
4. The additional allocations or accruals must separately satisfy the nondiscrimination requirements and the group of employees benefited by the amendment must separately satisfy the coverage requirements using the same rules that apply in determining whether a component plan separately satisfies coverage.
   1. A plan does not need to satisfy this requirement if the plan sponsor is amending the plan to conform to one of the nondiscrimination safe harbors. 
5. The amendment cannot be of a pattern of amendments being used to correct repeated failures with respect to benefits, rights and features.
   1. The relevant provisions of the plan immediately after the amendment with respect to benefits, rights and features remain in effect until the end of the first plan year beginning after the date of the corrective amendment.
   2. The corrective amendment either expands the group of employees to whom the benefit, right or feature is currently available, or eliminates the benefit, right or feature to the extent permitted under the anticutback rule. 
6. With respect to a 401(k) plan, an amendment may be considered for coverage purposes only if it provides a QNEC contribution to NHCEs who were not eligible to defer. The QNEC must equal the average ADP of the group of NHCEs who were eligible to defer for the plan year. Similarly, with respect to a 401(m) plan, the amendment may be considered for coverage purposes, only if it provides a QNEC contribution to NHCEs who were not eligible for the match. The QNEC must equal the average ACP of the group of NHCEs who were eligible for the match for the plan year.
   1. In the case of a rate of match issue, the allocations provided to NHCEs are treated as matching contributions to satisfy the current availability requirement but may not be used to satisfy other amounts testing.

Note: The 11(g) amendment also must have substance. For example, if the amendment provides an allocation to a participant who is unlikely to vested, the employee would receive no economic benefit from the amendment. Typically the drafter of the 11(g) amendment will avoid this issue by vesting the participant in the allocation.  

If the employer does not make the 11(g) amendment within the 9 ½ month period after the close of the plan year, must the employer resolve the issue under the IRS’s correction program? 

No. The employer could make the necessary contributions to pass nondiscrimination under the plan’s allocation formula. Unfortunately, the regulations do not identify a deadline for making contributions for nondiscrimination purposes. Most practitioners assume the contribution would need to be made within 12 months after the close of the plan year. Of course, a contribution made after the deduction and 415 deadlines, would be deductible and subject to the 415 limits in the year when made. 

We will further discuss this topic at our Advanced Cross-Tested Plans Workshop. See details below. 

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Upcoming Web Seminars
What Every Retirement Practitioner Should Know about IRAs, July 11, 2:00 p.m.ET
Advanced Required Minimum Distributions, July 16, 12:00 p.m. ET 
Impact of Same Gender Marriage Rulings on Retirement Plans, July 18, 2:00 p.m. ET (repeated on July 23, 2:00 p.m. ET)
Top-Heavy Rules: A Trap for the Unwary, July 25, 12:00 p.m. ET
Distribution and Taxation: Navigating the Maze, July 30, 12:00 p.m. ET
Coverage and Nondiscrimination Testing for Related Employers, August 1, 2:00 p.m. ET
Practical Guide to Plan Fee Disclosures - 3 parts, August 6-7-8, 2:00 p.m. ET
457(b) Plans for 401(k) Practitioners, August 15, 2:00 p.m. ET
Safe Harbor 401(k) Plans 2013 - 3 parts, August 20-21-22, 12:00 p.m. ET

For program details about upcoming Web seminars, and to register online: www.relius.net/events/events.aspx?Web

Fundamentals of 401(k) and Qualified Plans – Dallas, Chicago – last chance in 2013!
This 3-day program combines an introduction to 401(k) plans with a comprehensive study of defined contribution plan requirements and challenges of qualified plan administration. Speakers examine the unique administrative and testing rules essential to 401(k) plan compliance and use case studies and presentations to teach attendees how these rules apply to everyday situations. See details and register online here: www.relius.net/events/events.aspx?Seminar

Advanced Cross-Tested Plans: Adding More Tools – 12 cities, September - October
Restructuring, Age/Service Schedules, Banding, Family Members, and More
Cross-tested profit-sharing and 401(k) plans are among the most popular plan designs today. They can aid a practitioner in tailoring a plan for the needs of a business and its workforce. But cross-testing is not a “one size fits all” design. There are many approaches to a cross-tested plan, with very different outcomes. And unless a practitioner understands all the tools available for the plan, the practitioner may well provide a plan that is less effective or more costly than it could or should be. SunGard’s new Advanced Cross-Tested Plans Workshop adds to the tools practitioners have available to assist their clients. Registration will open soon. See program details here: www.relius.net/events/events.aspx?Seminar  

Chicago Advanced Pension Conference – August 28-30 – Early Fee Ends July 22
New this year – 75% more breakout sessions and topics; deeper registration discounts; experience Chicago on us - free Navy Pier’s Ferris wheel ride and Food Court voucher. Topics on the agenda include: tax reform, EPCRS 2013, pre-approved 403(b) plans, E&O coverage, component plan testing, 457 plans, disqualification, ERISA recapture accounts, early eligibility, TPA contracts, and more. Earn up to 19 hours of CE credits. See complete program details and register online on our Web site: www.relius.net/Events/seminardetail.aspx?CID=26172

Just for ERPAs Workshop – Chicago, August 27 – Discount for APC attendees
Scheduled on Tuesday, August 27, the day before the APC, this workshop covers prohibited transactions, details on 5330, what we are seeing in DOL and IRS audits, doctor plans, ethics, and more. Earn up to 8 hours of ERPA credit, including 2 ethics hours. Register for both the Chicago APC and the ERPA Workshop, and pay only $250 for the Workshop, a savings of $160. To take advantage of this offer, you must use the APC registration form. See event details and register online on our Web site: http://www.relius.net/Events/seminardetail.aspx?EID=26300