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Non-adopting employer allowed to participate


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A client with a controlled group of companies recently created a new company and transferred several plan participants to the new company. These employees were allowed to continue to participate, although the new company is not an adopting employer.

The document specifies that "an individual who becomes employed by the Employer in a transaction between the Employer and another entity that is a stock or asset acquisition, merger, or other similar transaction involving a change in the employer of the employees of the trade or business shall not become eligible to participate in the Plan until the Plan Sponsor specifically authorizes such participation."

We've been advised that this must either be corrected with a VCP filing, or by returning the ineligible contributions. I'm wondering why this couldn't be self-corrected with a retroactive amendment under the "Early inclusion of Otherwise Eligible Employee Failure" .

Meanwhile, the client continues to withhold deferrals and is not ready to make changes to the plan yet....

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I would have to parse through all of the relevant language of the Rev. Proc., but I am assuming that the "early inclusion" rules contemplate that the employer has a plan in place and, therefore, self-correction under those rules is not available.  Sounds to me like it would be a slam dunk in VCP. 

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Maybe there is legal counsel who was involved in the underlying transaction who dropped the ball and can be persuaded to "chip in."

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Revenue Procedure 2016-51 appears to provide for retroactive amendments (via SCP) for "early" inclusion only when the employer has overlooked the plan's eligibility or entry date requirements.  The individuals you describe appear to have been been brought in early for some other reason (i.e., a non-adopting employer).  For example, if someone in an excluded classification is inadvertently brought into the plan, that would appear to require correction via a full VCP application (if done via an amendment), and not via this SCP amendment provision.  Also, although probably not at issue here, the SCP corrective amendment is not a free pass even for eligibility and entry date violations.  For example, the group affected must also be "predominantly" NHCEs.

 

It may be that others take a more expansive view of the following provision, and perhaps would amend under SCP for all early new entrants, regardless of the reason for the early inclusion.  If so, I will not argue.  I merely bring the exact language of EPCRS to your attention for your own evaluation.

"(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. For a defined benefit plan, a contribution may have to be made to the plan for a correction that is accomplished through a plan amendment if the plan is subject to the requirements of § 436(c) at the time of the amendment, as described in section 6.02(4)(e)(ii)."

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