New controlled group companies

[jpokusa]

One of our clients has a 401(k) plan.  During 2017, the employer created 2 new controlled group companies.  All of the employees then became employees of one of the new companies.  We were never informed of this and the 2 new companies were never added to the plan as participating employers.  They continued to deposit deferrals for the employees.  Do the deferrals have to be refunded?  Or can this be corrected under EPCRS?  Any other suggestions?

[C. B. Zeller]

If all of the employees were transferred to other employers, then you have a coverage failure and you can adopt an 11(g) amendment to correct it.

[jpokusa]

Thanks,  Hadn't thought about that.

[Mike Preston]

You hadn't thought about that because you can't use an -11g amendment to cure faiures involving deferrals.  Don't have time today to investigate what should be done,, but an -11(g) isn't it.

[jpod]

Sounds like a minor foot-fault to me.  I would have the appropriate documentation executed retroactively (dated currently, not back-dated), and take my chances with an auditor, whether it's an IRS auditor or, if applicable, the auditor engaged to perform the annual 5500 audit. 

[Luke Bailey]

I believe about the only thing IRS won't let you correct in VCP is deferrals before a plan is adopted. However, here there was a plan and deferral elections under it, just failure of new employer to adopt. I think they would probably allow you to fix that in VCP, although you might want to call a contact in VCP first.

BTW, not disagreeing with jpod's advice, but there is no certainty that way. And if the plan is > 100 so requires an independent audit for 5500, I don't think the CPA would cut you slack if he/she found the error, so you would need to go to VCP then anyway.

[jpod]

Unless there are some facts which weren't presented that suggest some operational errors or coverage problem issues, this would be a slam dunk in VCP.  I am merely suggesting that because this "error" has nothing really to do with the plan per se I see very little risk here by skipping VCP.  It's not like a new employer with its own separate workforce started participating without adopting the plan.  This was merely a redeployment of the same active participants from one employer entity to another, with deferral agreements already in place.