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Exclusion of Eligible Employees


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We have a group of eligible employees -- basically workers who work for 6 months or less, but aren't expressly excluded by the plan -- who have not been given the opportunity to defer (match not an issue).  We are doing a VCP and considering a retroactive amendment to exclude these people (rather than making QNECs).

This group has always understood they are excluded, and the employee handbook excludes them, but the plan document does not.  Unfortunately, as you might guess, they are all non-HCE's.  Any chance the IRS goes for this?  Should I even try?

If we don't do a retroactive amendment, we will have to do QNECs.  This problem potentially dates back to 2005 -- would we have to correct that far back?  Or can we just correct back to 2015, based on the 3-year audit / statute of limitations period?

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yes give it a shot since the employer's intention is reflected in employee communications.  make sure you show it does not affect coverage, non-discrimination, etc.  Worst case scenario is they say no and you have to make qnecs.  The IRS made some concession on a VCP filing we did in a similar situation.

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Calexbraska, to answer the question in your third paragraph, if the VCP submission is not successful (and as PensionPro points out, it might succeed, depending on many factors), you would not be able to limit the correction to the statute of limitations period (the routine audit period is irrelevant) if you wanted to maintain the plan's qualification. In the words of Frank Sinatra, it's "All, or nothing at all."

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  • 3 weeks later...

One option is an anonymous VCP submission. If you like the IRS answer you can disclose the name of the plan. If not, you do not have to. But keep in mind, if the plan is subject to audit while the anonymous submission is being reviewed, you will not have protection under VCP. 

Whereas typically if a plan is selected for audit after starting VCP the IRS can't resolve any VCP submitted errors under audit cap. And yes, this happens, I had a plan selected for audit the day after it submitted an error for correction under VCP. That was a regular submission, not anonymous so the IRS agent did not ding the plan for the error since it was already underway with VCP. 

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