Early Inclusion of Otherwise Eligible Failure

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I have an operational failure whether otherwise eligible employees (all NHCEs) where included prior to meeting the plan's minimum service requirement.  The money was deposited in the Plan (a 401(k) Plan on a prototype document), but sat in cash for a couple of months.  It appears from the reading of EPCRS that this can be self-corrected by retroactively amending the plan to permit those employees to enter the plan.  I have three questions I was hoping to get your opinion on:

1. The example correction in Rev. Proc 2016-51 provides for SCP by retroactive amendment, but also includes the submission of the amendment to the IRS for a determination letter.  This would no longer be an option beginning 1/1/2017, correct? 

2.  Earnings would need to be applied - since these employees never directed their investments, this would be based on the default fund provided in the plan, correct? 

3.  What if instead the facts were an error was made where only some of the otherwise eligible employees (all NHCEs) were included prior to meeting the plan's minimum service requirement.  Can this be self corrected through SCP by only including those let in early or would that require a VCP submission?

Thank you for your time

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Madison71, in the bulleted list in Section 2.04 of Rev. Proc. 2016-51 of the differences between Rev. Proc. 2016-51 and Rev. Proc. 2013-12, the IRS notes as one of the changes:

"* Deleting rules (previously in § 9.03 of Rev. Proc. 2013-12) relating to submitting a determination letter application when correcting by plan amendment under SCP."

Elsewhere, the IRS notes that the above change and several others were required by the changes to the DL submission program under Rev. Proc. 2016-37. So I think that the IRS's leaving in the reference to the DL submission requirement in the example in Appendix B, Section 2.07 of Rev. Proc, 2016-51 is a typo. The basic rules for SCP by plan amendment are in Section 4.05(2) of Rev. Proc. 2016-51, below. You will note that there is no mention of a DL submission requirement:

"(2) Availability of correction by plan amendment in SCP. A Plan Sponsor may use SCP for a Qualified Plan or 403(b) Plan to correct an Operational Failure by a plan amendment in order to conform the terms of the plan to the plan’s prior operations only with respect to Operational Failures listed in section 2.07 of Appendix B. These failures must be corrected in accordance with the correction methods set forth in section 2.07 of Appendix B. Any plan amendment must comply with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6), to the extent applicable to the plan. If a Plan Sponsor corrects an Operational Failure in accordance with the approved correction methods under Appendix B, it may amend the plan to reflect the corrective action. For example, if the plan failed to satisfy the ADP test required under § 401(k)(3) and the Plan Sponsor makes qualified nonelective contributions not already provided for under the plan, the plan may be amended to provide for qualified nonelective contributions. SCP is not otherwise available for a Plan Sponsor to correct an Operational Failure by a plan amendment."

Edited by Luke Bailey
hit send before completing thought

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