Inclusion of Ineligible Employees - SCP by Amendment

[Guest Dressageho]

I have a client who has a 401(k) Plan that has 1 year of service and age 21 eligibility requirements. They allowed two ineligible employees to participate; one failed the one year of service and the other failed the age requirement. Both are NHCEs and neither is related in any way to the owners. I would like to correct this through SCP, but have only ever done this with an Amendment that changes the eligibility provisions on a prospective basis in conjunction with the continued participation of the previously-ineligible employees. However, the employer wants to correct without distributing the money back to the two employees and does not want to change the eligibility requirements on a prospective basis (it would be an administrative nightmare with the amount of census turnover related to his business).

One employee is now eligible. However, the employee who failed the age requirement will not be eligible to participate for another couple of months. Is there a way to self-correct by:

1. Adopting an Amendment that does not changing the eligibility requirements, but rather just allows the two employees

to have participated to the extent they already have prior to becoming eligible;

2. stop the one employee's elective deferrals until he is actually eiligible; and

3. not distribute the prior elective deferrals?

Any ideas?

[Guest Dressageho]

Okay, after I posted this, I came across a source that directed me to the applicable section of Rev. Proc. 2008-50 (which I missed during my initial review):

Appendix B, Section 2.07

(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment Correction Method. The Operational Failure of including an otherwise eligible employee in the plan who either (i) has not completed the plan’s minimum age or service requirements, or (ii) has completed the plan’s minimum age or service requirements but became a participant in the plan on a date earlier than the applicable plan entry date, may be corrected by using the plan amendment correction method set forth in this paragraph. The plan is amended retroactively to change the eligibility or entry date provisions to provide for the inclusion of the ineligible employee to reflect the plan’s actual operations. The amendment may change the eligibility or entry date provisions with respect to only those ineligible employees that were wrongly included, and only to those ineligible employees, provided (i) the amendment satisfies § 401(a) at the time it is adopted, (ii) the amendment would have satisfied § 401(a) had the amendment been adopted at the earlier time when it is effective, and (iii) the employees affected by the amendment are predominantly nonhighly compensated employees.

I hope this helps someone else more quickly than it took me to find the answer...sigh.

[Lou S.]

I was just coming to look at this because I have a near identical situation.

I'd already found that section of the revenue procedue but your followup does help, thanks. T

he question I have that the example in the rev proc that follows requires you subimt for DL when you correct by amendment. This is an SCP correction do you still need to submitt the for an individual DL even if this is an approved proto-type plan?

[Kevin C]

Take a look at Section 6.05 of Rev. Proc. 2008-50.

.05 Submission of a determination letter application. (1) In general. This section 6.05 sets forth the situations in which a determination letter application is required to be submitted as part of the correction of a Qualification Failure if the correction includes a plan amendment. If a determination letter is required under this section 6.05, then, unless otherwise specified in this revenue procedure, the provisions of Rev. Proc. 2007-44 will apply. Thus, for example, in the case of an ongoing individually designed plan, a determination letter application will be reviewed with respect to all items of the Cumulative List (as defined in Rev. Proc. 2007-44) that would apply to the remedial amendment cycle during which the determination letter is filed. Notwithstanding any other part of this section 6.05, a determination letter is not required if the correction by plan amendment is achieved through the adoption of an amendment that is designated as a model amendment by the Service or the adoption of a prototype or volume submitter plan with an opinion or advisory letter as provided in Rev. Proc. 2008-6, 2008-1 I.R.B. 192, on which the Plan Sponsor has reliance.

If you are concerned that the adoption of an amendment to a pre-approved plan won't be considered as correcting by the adoption of a pre-approved plan, you can restate the document.

[Lou S.]

Thanks, much appreciated.

[PensionPro]

Can the plan still rely on the advisory or opinion letter after adding a provision relaxing the eligibility requirement for some employees?

[Kevin C]

It will depend on how the amendment fits into the document. If the amendment can be done within the options available in the document, you would still have reliance on the opinion letter. So, if the amendment can be done using an "other" line in the adoption agreement without having to submit for a determination letter, you should be ok. The adoption agreement will tell you if the use of a certain option requires submitting for a letter. But, if for example, you had to add some extra language to the adoption agreement to make the amendment fit, then you lose reliance on the opinion letter.

The conditions for employer reliance on the opinion letter are in Rev. Proc 2005-16, Section 19.

[PensionPro]

Thanks for the helpful comments.

[Guest Erin W]

Okay, after I posted this, I came across a source that directed me to the applicable section of Rev. Proc. 2008-50 (which I missed during my initial review):

Appendix B, Section 2.07

(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment Correction Method. The Operational Failure of including an otherwise eligible employee in the plan who either (i) has not completed the plan’s minimum age or service requirements, or (ii) has completed the plan’s minimum age or service requirements but became a participant in the plan on a date earlier than the applicable plan entry date, may be corrected by using the plan amendment correction method set forth in this paragraph. The plan is amended retroactively to change the eligibility or entry date provisions to provide for the inclusion of the ineligible employee to reflect the plan’s actual operations. The amendment may change the eligibility or entry date provisions with respect to only those ineligible employees that were wrongly included, and only to those ineligible employees, provided (i) the amendment satisfies § 401(a) at the time it is adopted, (ii) the amendment would have satisfied § 401(a) had the amendment been adopted at the earlier time when it is effective, and (iii) the employees affected by the amendment are predominantly nonhighly compensated employees.

I hope this helps someone else more quickly than it took me to find the answer...sigh.

I am in the process of using this method to correct the inclusion of an ineligible employee. My question is literally how the amendment should be written. Since we are not amending the entire plan's eligibility but are simply amending to retroactively permit participation by only the ineligible employee, do we just include the employee's name in the amendment??

[Guest Sieve]

I would say, Yes. But, if you'd rather not do it that way, why not identify this employee by date of hire and, if necessary, by department or job classification (just as they identify companies in special interest legislation by incorporation date, etc., rather than by name).