We often receive questions whether a certain plan feature can be added or removed from
a plan at any time during the plan year. This article will provide general guidance as to
the timing rule for plan amendments and review some of the more common plan
Before a plan feature is administratively acted upon, a plan amendment authorizing the
feature must be in place. For example, if a plan currently does not permit plan loans, but
the sponsor now wants to permit plan loans, the plan must be amended to permit plan
loans prior to any participant taking a plan loan. Otherwise, the plan will not be operated
in compliance with the plan document and correction will need to be made through the
VCP program (not self correction, since the correction involves a plan amendment).
Also, elective deferrals must not commence until the plan is amended or created to permit
elective deferrals. The elective deferral portion of the plan may have a separate effective
date than the rest of the plan.
Before a plan feature is removed, you must determine if the feature is protected under
Internal Revenue Code Section 411(d)(6). If it is, then the feature may need to be
preserved, or at least preserved through a certain date. If the plan feature is not a
411(d)(6) protected feature, you must determine if any participant has accrued a right to
that feature during the plan year. While there are differing opinions as to the timing of a
plan amendment that modifies a plan’s allocation formula, a safe approach would be to
modify the allocation formula prior to any participant accruing a right under that
particular formula. For example, if the plan formula is an integrated formula and the plan
sponsor wishes to amend the formula to a cross-tested formula and the only allocation
requirement is 1,000 hours of service, you must determine whether any participants met
the allocation requirement and if so, then those participants’ allocations under the crosstested
formula must equal or exceed the allocations provided by the integrated formula.
Required statutory or regulatory plan amendments may be prepared and applied
retroactively per the Internal Revenue Service rules. Examples of these include the Cashout
amendments, Required Minimum Distribution amendments and restatements.
Optional statutory or regulatory plan amendments must be in place in order to apply those
optional provisions to the plan. For example, adding Roth 401(k) features and expanding
the definition of hardship for hardship distributions must be done in the plan year for
which they apply.
A 401(k) safe harbor feature can be added to a profit sharing at any time during the plan
year, as long as it is in place for at least three months. For example, for a calendar plan
year, a 401(k) safe harbor can be added to a profit sharing plan as long as it is in place by
October 1. However, a 401(k) safe harbor feature cannot be added to an existing 401(k)
plan during a plan year. The safe harbor feature can only be added at the beginning of
the plan year.
A 401(k) safe harbor feature can be removed from the plan during the year as long as the
participants are given 30 days prior notice of the change and the opportunity to change
their deferral election. Any safe harbor contribution accrued prior to the change must be
made to the plan. If the safe harbor is removed during the plan year it cannot be
reactivated that same year and the elective deferrals and matches will need to be tested
using the ADP and ACP tests. A safe harbor may be re-elected for the following plan
Finally, with any plan amendment, you should ensure that the plan amendment, in
operation, is not discriminatory. For example, if the plan sponsor amends the plan to
permit loans and then six months or a year later, amends the plan to remove the plan loan
feature prospectively and the only participant who took a plan loan was a HCE, there may
be a discrimination issue as to the “availability of a plan feature.”
Thus, the preparation and the timing of plan amendments require careful consideration as
to the type of amendment (e.g., required or optional), whether 411(d)(6) is applicable,
whether participants have accrued a right in the feature to be amended and whether there
are any potential discrimination issues.