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Qualification failure ..... Plan Document Failure...?


Guest Moe Howard2
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Guest Moe Howard2

A SEP adoption agreement was signed in 2003. The adoption agreement was a "check the box" type. It was completed by the plan's broker and given by broker to sponsor (employer) to sign.

The employer did not read the adoption agreement, he simply signed it.

The agreement's service eligibility box was marked "0 years", but the employer was told by broker that an employee would have to work there 3 years before he/she could become eligible.

The sponsor's accountant has recently read the 2003 adoption agreement, and informed the sponsor that all past and current employees met the eligibility requirement ( 0 years) of the agreement .... and should have entered the plan in 2003 and 2004.

The employer says, he did not read the adoption agreement he signed. He relied on the broker when broker said 3 years service for eligibility.

According to past tax returns, the employer (as employee) entered the plan in 2003. he has been an employee since 1998.

My question:

Can the "0 years" stated on the adoption agreement now be deemed a PLAN DOCUMENT FAILURE and corrected (changed to 3 years) rectroactively under the the Employee Plans Compliance System ?

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The original adoption agreement can be replaced and destroyed to eliminate all evidence. However, you cannot advocate such an action, as it would be unethical. Obviously under these circumstances, employees are entitled to what they can get a court to say. They should go to the financial institution for a copy of the plan documents (which will not be destroyed).

The employer cannot rely on his intent. The statute of frauds denies the employer the ability to disclaim the written instrument that replaced his stated desire to have things done differently.

Let's hope the broker is not judgment proof! Because if the employer has to pony up, he can go after the broker.

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This is a question of whether there is a sound if a tree falls in the forest and no one hears it fall. The employer has liability risk to employees for 03 & 04 if the employees discover the terms, which could be corrected by making the contributions. The risk for having the deductions for the owner denied by the IRS is generally 3 years from the date the return is due (4/15/08 for the 04 return). It is also a good example of why employers should pay for a review of plan documents by a tax professional before adoption.

mjb

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Guest Moe Howard2

I thought the statute of frauds only deals with contracts. Is an adoption agreement a contract? I think not. There is no offer, acceptance, or consideration. A person has to sign their individusl income tax return, but the return is not a contract.

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How about the SEP is one of the terms of the offer of employment, is accepted by accepting the offer of employment and the consideration is providing services to the employer? The breach of contract is not getting the SEP benefit when the contract terms say the employee is entitled to the deposit in the employee's account. The employer documents the the terms of offer by the preparing and signing the SEP document. I am making no comment on the proposition about statute of frauds or outcome under a contract theory. There are loots of fun things left to consider under contract law, such as communication, mistake and the effect of ERISA provisions. However, it is helpful to look at a benefit plan as a contract.

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Guest Moe Howard2

QDR, the employees don't sign the adoption agreement. An adoption agreement is not an employment contract.

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Can the  "0 years"  stated on the adoption agreement now be deemed a  PLAN DOCUMENT FAILURE  and corrected (changed to 3 years) rectroactively under the the Employee Plans Compliance System ?

The following excerpt from Rev. Proce. 2003-44 defines a Plan Document Failure.

I do not follow your logic that the mistake you describe might qualify.

Plan Document Failure. The term "Plan Document Failure" means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of § 401(a) or § 403(a). Thus, for example, the failure of a plan to be amended to reflect a new qualification requirement within the plan's applicable remedial amendment period under § 401(b) is a Plan Document Failure. In addition, if a plan has not been timely or properly amended during an applicable remedial amendment period for adopting good faith amendments for statutory changes as provided by the Service, but the plan is operated as though the good faith amendments were adopted, then for purposes of EPCRS, the plan is considered to have a Plan Document Failure. For purposes of this revenue procedure, a Plan Document Failure includes any Qualification Failure that is a violation of the requirements of § 401(a) or § 403(a) and that is not an Operational Failure, Demographic Failure, or Employer Eligibility Failure.

...but then again, What Do I Know?

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Guest Moe Howard2

WDIK, what makes you think that I believe the mistake might qualify for correction under EPCS ?

I don't know if it will qualify .... that is why I asked the question?

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Moe Howard2:

I certainly apologize. It was not my intent to come across as snide, arrogant or demeaning. I will try to word my posts more carefully in the future to avoid any misunderstandings.

I hope that the cite from the Revenue Procedure was of some use to you.

...but then again, What Do I Know?

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Guest FormsRmylife

There is another small point. The SPD for a SEP (assuming use of the IRS standard form) is the SEP itself. The employee is required to receive a copy.

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Guest Moe Howard2

FormsRmylife: I thought that the form you refer to is not supposed to be given to employee until the employee has met the SEP's eligibility requirements.

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Guest Moe Howard2

So an ERISA plan is a contract? I find that hard to believe. Enforcement of the terms of an ERISA plan are done under the rule of law for sure .... but that rule of law is not contract law ... it's done under ERISA laws.

Besides, a SEP is not an ERISA plan, is it ???? Or maybe I'm thinking that it is not a qualified plan.

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Guest FormsRmylife

The employer is bound by the terms of its plan as under a contract with the employees as third party beneficiaries. The terms of the plan document can be enforced against the employer. And yes, this is an ERISA plan. Although IRAs are used, it receives employer contributions making it subject to ERISA.

As to providing an SPD, I assumed that this year or next an employee would be eligible even under the 3 year rule and would have to be shown something. I suppose it could be a form dated 2005 with the 3 year requirement that would function as an amendment.

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  • 2 weeks later...

In my experience, under EPCRS, the IRS generally will require that there be some "consequences." The method proposed (i.e., amending the plan to "3" years as it was administered) offers no "consequences." Aside from agreeing to amend the plan to "something more than zero and less than three years," the same fix does not have to cover all years. All years could be corrected per Code, but might be aggregated into a single year if done under the EPCRS.

You will also find that the procedures for SEPs under the EPCRS are somewhat flawed. Incidently, it doesn't really matter what name the failure is given. They failed to follow plan provisions, they have reasons for doing so, and now ask for correction. Self-correction or anonomous correction might also be possible, but would probably be more costly.

If the SEP was a SARSEP, or if the plan is top-heavy it gets a bit more complicated and there are several competing procedures available. They all have to be analyized before the most appropriate method is presented to IRS (e.g., disgorge later years, and fix earlier years (sob story needed here!)).

If the contributions have not been made for 2004 and the employer is under extension, it may be possible to amend the plan for 2004 contribution purposes. Remember too, that the employer would generally have to been able to select 3 years when the plan was INITIALLY adopted to change it to 3 years (to prevent discrimination if new employee's perform service).

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WDIK, you sound like an ass.

I missed this until now, but WDIK I am sorry for your demise much like mine.

Blinky, usually you are right on the mark ... but this time you are full of crap.
...but I would suggest that he, and others like him, follow in the steps of of Tom & WDIC who seem to have something of substance to say in their replys.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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WDIK I am sorry for your demise

"...and thank you so much for bringing up such a painful subject. While you're at it, why don't you give me a nice paper cut and pour lemon juice on it?" - Miracle Max

...but then again, What Do I Know?

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I agree with WDIK that this can't be corrected as a plan document failure. And while I will leave it to the ERISA attornies for a definitive answer, I respectfully disagree with FormsRmylife that a SEP is an ERISA plan just because there are employer contributions.

I think the employer is stuck - pay up, then check with counsel to see if there is recourse against the broker. Or better yet, check with counsel first.

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In order to make the employer pay there must be an enforceable obligation entered into by the employer to make a SEP contribution. I dont know whether a SEP adoption agreement can be enforced by an employee against the employer for a SEP contribution if contributions are discretionary--Does employer contributions to the owners account mandate contributions for all eligible employees if the agreement provides for contributions based on the same percentage of pay for all eligible employees?

mjb

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Guest FormsRmylife

First, on the ERISA point, SEPs are under ERISA per DOL Regulation section 2510.3-2(d). The employer contribution brings them under ERISA.

Second, my point about providing a copy of the SEP as the SPD, is that the employee will learn of the situation if he understands what he is shown. Therefore, the situation should be dealt with.

Third, the employer contribution to an IRA account in excess of the IRA limit can only be done based on the SEP. Therefore, once the employer contributes to his own account, the conditions of the SEP must be met. As completed, the SEP form used requires a contribution for employees and does not limit the group to employees with 3 years of service.

If the employer is audited tomorrow, I do not think the IRS will be sympathetic with the employer's contribution deduction.

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FormsRmylife - thanks for the cite. I never realized this - since SEP's are exempt from most of the other ERISA reporting and disclosure requirements, I always assumed (and you know what that leads to!) that they weren't ERISA plans.

What practical application does this have? I mean, there's apparently no bankruptcy protection such as a "normal" Title I plan would have, no Trust requirement, no QJSA, etc...

Thanks again.

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The new bankruptcy law has added protection to all IRAs in bankruptcy up to $1 Million. The $1 Million limit does not apply to Rollovers from Qualified Plans.

JEVD

Making the complex understandable.

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SEPs are covered under ERISA to the same extent as a Top hat plan - eg. subject only to the minimal R & D for SEPS and exempt from Parts 2-4 of ERISA. State laws are preempted. SEPS and SIMPLES are considered qualified plans under the Bankruptcy law revision and amounts in excess of $1M are exempt from creditors claims.

mjb

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