SCP Correction by Plan Amendment for Early Inclusion

[ERISAAPPLE]

We have a plan that has allowed all participants into the plan early for more than 20 years.  Both HCEs and NHCEs were allowed in early.  If the early inclusion of participants is significant (or assumed to be significant), can we adopt the retroactive amendment under SCP?  Does the requirement that significant operational failures be corrected within two years apply to corrections by plan amendments?  Assume there is no discrimination issue.    

[Madison71]

My understanding is that you have to do the same facts and circumstances analysis - significant vs. insignificant when beyond the 2 year window.  As you stated, this is significant (or assumed to be significant) and beyond the 2 year window, so I believe it would fall under VCP.  I believe there is an example of this issue in Appendix A of EPCRS that corrected via retroactive amendment under SCP, but it is within the 2 year window. 

[ERISAAPPLE]

I saw that example.  I am still not sure.  Obviously the more cautious approach is VCP.  

 

 

[Madison71]

My understanding is retroactive amendments beyond the SCP for significant errors is limited to hardships and loans.  

[ERISAAPPLE]

42 minutes ago, Madison71 said:

My understanding is retroactive amendments beyond the SCP for significant errors is limited to hardships and loans.  

Madison71, where do you find the guidance that says that?

[Belgarath]

I suspect she is thinking of Appendix B, .07. But my take on all this is that yes, you are permitted under that same section .07 (3) to correct the early inclusion of otherwise ineligible employees, BUT, this doesn't override the normal timeframes for SCP. So assuming you consider your error significant, then I think you must file under VCP.

[Madison71]

Belgarath - that is the section I was thinking of.  Thanks

[ERISAAPPLE]

I don't see  language in 2.07 of Appendix B that limits a retroactive amendment for significant errors through VCP to hardships and loans.  In any event, I think the phrasing "may use SCP" in Section 4.05(2), when combined with the language in Section 1.03 of the Overview, suggests that the better conclusion is a retroactive amendment to correct an error listed in Section 2.07 of Appendix B that is significant can be corrected under SCP only if the retroactive amendment is adopted within the correction period described in Section 9.02.  

[Luke Bailey]

See 4.05(2) of Rev. Proc. 2016-51, then go to App. B, section 2.07. If this goes back 20 years, I am sure it is significant. You need to meet all the requirements of 2.07(3) (e.g., of 401(a), such as exclusive benefit, nondiscrimination), and your included group must be predominantly NHCE. 4.05(2) says:

(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.

[Mark Poerio]

Good evening - Compliments on the excellent dialogue. My #1 suggestion involves considering a "John Doe" filing.  We do this often, for long-term problems, in order to propose an affordable, viable solution on an anonymous basis. Employer stays anonymous until an acceptable solution occurs - providing leverage in negotiation, and the potential to avoid corrections going back many years. Glad to provide more info, Mark