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khn

Date of Adoption Agreement Signatures

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A plan was established in 2016. The TPA provided an adoption agreement effective January 1, 2016. One trustee signed it December 19, 2016 and the rest signed it 1/1/17.  Contributions were not taken until 2017. What can the Plan do to remedy this? They are moving to another recordkeeper, and the shortcomings like this with their current provider are why.

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I think you are remeding it.  You are getting a better service provider.  I don't think there is anything that you need to do to fix the past. 

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Remedying what problem?  Did the employer adopt the plan in 2016?

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That is the correct question - when did the EMPLOYER sign? I don't see an issue with the staggered trustee signatures.

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You only need one trustee, so most likely the legal conclusion is that the trust was formed before end of year. To show the plan was adopted in 2016 you need to have the adoption agreement signed by Dec 31, 2016, or would be to have some other record of adoption in 2016, e.g. board resolutions.

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Thanks for  your responses. The issue is the Employer signed 1/5/17 but the effective date in the Adoption Agreement is 1/1/16. Is there anything that could/should be done prior the Plan moving to a new recordkeeper? 

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I think the IRS position is you cannot adopt a plan after the last day of the first plan year, but I cannot recall if that comes from Regs or somewhere else.

Under the new SCP for plan doc failures, you can maybe do SCP under EPCRS.  If we assume this is a scrivener's error (i.e. a clerical failure to update the doc date to reflect the 2017 date everybody intended to treat the plan as adopted) then I think SCP is fine.  But if you assume that the plan was never adopted because it was for a previous year, then SCP is not available for failure to timely adopt a written plan.

I think SCP probably makes sense if nobody treated it as existing before 2017.

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I think the IRS position would be that there was no plan until, at the earliest, 1/1/17. I say that because I don't see the distinction between a discretionary amendment and the discretionary act of adopting a plan. In both cases, I would conservatively argue, the latest possible date of adoption by the EMPLOYER is the last day of the plan year of implementation (i.e., using the discretionary amendment rule stated in a series of IRS Revenue Procedures). There might even be a better authority or doctrine that states that plans must be adopted by the end of the first plan year, but offhand, I cannot think of it. (I am almost certain there is another, better source (citation) for plan implementation.) In any event, I think a poll of practitioners would show 99% agreeing (for one reason or another) that the employer's deadline for signature is 12/31/16 for a calendar-year plan being implemented in 2016. In fact, you can Google it yourself, because at the end of every calendar year nearly every accounting firm handling personal accounts publishes a newsletter saying something along the lines of "unlike an employer tax-qualified plan, which needs to be adopted by 12/31/xx, you still have time left after the end of the year, until the tax filing deadline of 4/15/xx+1, to adopt your own IRA or a SEP retirement plan."

On other facts, I might suggest that you have the situation where the single trustee signature on 12/19/16 is also the signature of the employer, i.e., one individual can act in both capacities. I think you would then have good reason to assert the plan was (in fact) established in 2016. I can only assume, though, that this is not so, since you now add that "the employer" signed on a date other than the date that "the trustee" signed, and so I can only presume that the employer is not also the trustee.

Note that if this is a 401(k) plan, then in accordance with the 401(k) regulations no deferrals were permitted to be deducted from pay until the employer signs the plan document (and the document should so state), which means no deferrals could be taken out of pay until 1/5/17 on your facts, even if somehow you can argue successfully that the plan started in 2016 for purposes related to deferrals.

You cannot easily correct this "error" because the date of signature is not an error.  It is a legal representation by an individual attesting to an event that occurred at a specific time.  The only error here is that the employer didn't know to sign (or knew but failed to sign) the document by the end of 2016. That is not a plan error. It is not a scrivener's error, which is when a plan document contains unintended language. You can deduce intent from the fact that the employer operated a plan in 2016 by all the rules but for the date of execution. Maybe that will work, and maybe it won't. (You can tell the IRS that you intended to file your tax return by the tax filing deadline, but it won't do you much good when you get an unsympathetic bill from the IRS.) The only "correction" that I can find is to re-do the administration retroactively as if 2017 was the year of implementation, and use VCP to obtain a resolution stating that all necessary retroactive corrections were correctly corrected.

You are best advised to find legal counsel who has assisted similarly situated employers in the past, i.e., perhaps making the argument that the operation of the plan is sufficient evidence of the intent to operate a plan (to which I say "good luck" with that, but what do I know?). I can't help but point out that after you convince the IRS of the fact that the plan really started in 2016, you may find yourself needing to also convince the DOL of that same thing, and of the two, I would prefer to tangle with the IRS on tax matters than with the DOL on labor matters. That isn't to say that the DOL will not be sympathetic (depending upon the facts), I merely point out that the IRS is not the only sheriff in this town.

Think of the plan document as being like a will. The will was drawn up correctly, but perhaps it was executed too late to enforce the intent of the deceased as to a particular beneficiary or the disposition of a particular asset. There is nothing to fix in the will itself, and, in any event, it is too late to execute it at a different time. Maybe all the stakeholders will agree to acknowledge what can clearly be shown by other evidence as the signer's intent when drafting the will, but maybe not.

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I think Doc Ument has a pretty good summary of the situation and likely IRS position but I'm curious -

1 - Is the trustee who signed the document in December 2016 also an officer, partner, and/or principal of the Employer authorized to execute documents on behalf of the employer?

2 - Is there a resolution, board minutes, or similar document in December indicating intention to adopt the Plan executed in December?

3 - Did the company fund benefits for 2016 and or file a 5500 for the 2016 year?

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Thanks all for your insights. The Plan Sponsor is a corporation. They did file a 5500 for the 2016 plan year. Contributions were processed in November and December 2016.

The one trustee who did sign in 2016 is not an officer/partner/principal. We're trying to research if there is a board resolution or minutes.  

Do you see this as something that will prevent the new recordkeeper from taking the Plan on?

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5 hours ago, khn said:

Contributions were processed in November and December 2016.

 

On 5/7/2019 at 10:07 AM, khn said:

Contributions were not taken until 2017.

Which is accurate?

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khn, my guess is that this is something that would create a problem with service providers, but that's just a guess and of course I don't have all facts.

You say you are looking for board resolutions/minutes. From a legal standpoint, if they exist and reflect board action before the end of 2016, I think you'd be in much better shape.

If there are no board resolutions or other record of board action in 2016, then you may find the issue of whether you can correct this in VCP or with a non-VCP voluntary closing agreement controversial among practitioners. I seem to have recalled seeing statements from IRS that the one thing you can't correct in VCP is failure to adopt, or at least failure to adopt a 401(k) where you have a CODA. My guess, nevertheless, is that you could fix in VCP or with a non-VCP voluntary closing agreement, but that is only a guess, because I've never had exactly that case. Maybe folks who have dealt with this situation in VCP will let us know their experience.

The reason I think the IRS at least should allow this to be fixed in VCP (besides just general principles of kindness and practicality) is that where you have an ineligible employer (e.g., a for-profit, separately incorporated bookstore on the campus of a university that adopts a 403(b), or a 100+ employer that adopts a SIMPLE), the IRS allows you to "correct" in VCP by just stopping the sponsorship of the wrong plan and starting the right plan. While that is different from not having signed your paperwork timely for the right plan, it's not a whole lot different.

I think there was a recent discussion about this issue on this message board and several practitioners say they had handled in the past, under the old periodic determination letter system, by submitting new documents and calling them late amenders. That seems to me to have a number of issues and I am not recommending it (and based on experiences I have had with IRS DL folks, I frankly am surprised that it worked for anyone), but I mention it just as an example of what is out there.

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