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shERPA

PCs didn't adopt plan - odds of success?

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Taking over a 401(k) set up by one of the payroll companies in 2017.  It is a law firm organized as a partnership of professional corporations.   The three partners did make 401(k) deferrals both years, however the processing payroll company did not include the individual PCs as adopting sponsors of the plan.

Think IRS would approve a correction for them to adopt the plan now retroactive to 2017?   There are about 50 non-partner employees of the partnership who are in the plan (about 2/3 of them are NHCEs).  

Thanks. 

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The question you ask is one we have been struggling with a bit more broadly: If a participating employer does not execute a participation agreement (where the plan says controlled group member do *not* participate until they do), can that be "self-corrected"  under the new EPCRS rules?  Wagner law group (Marcia's team) has said "yes" under the theory that you have always been able to retroactively amend a plan to include those who have been participating (although, that "fix" allows you to include "otherweise eligibles" troactively - and given our document says they *aren't* eligible unless... I'm not sure it would work for us).  Ferenczy law (Ilene's team) says no - it is akin to originally adompting a plan - which requires a "document" *before* participation begins.  Any thoughts?

I think the answer to your question is - "possibly" through a VCP filing - and we have done that several ties - even when the participating employer had many HCEs (although, you never know since you are dealing with "partners" (presumably HCEs) entirely)

 

 

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shERPA, absent egregious bad facts, I think it's an easy VCP, and think that using Rev. Proc. 2019-19 to try to self-correct would be aggressive. The self-correction expansion in 2019-19 is not very well defined, and at some point the IRS will start clarifying the sorts of things that can't be self-corrected through plan amendments under the new guidance, and you might be on the wrong end of the stick when that guidance comes out.

When I have represented clients (e.g., small professional firms) with similar facts in the past, we have argued, with some success, that under the applicable state law, which will typically permit closely held companies to have lowered corporate formalities, the PCs had, in effect, adopted by resolution or shareholder meeting. (Hey, with one shareholder, it's easy to have a meeting!) But VCP is probably better than relying on that argument if you don't have to.

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Thanks for the comments Luke and MoJo.   Yeah, I'd not be comfortable relying on self-correction at this point.   

My sense of it is that the biggest challenge to doing this thru VCP is actually getting the plan assigned to a reviewer and thru the process.  We have one now at 12 months, not assigned, and another at 10 months, not assigned.   We need a "if you don't hear from us in a year your application is deemed approved" provision. 

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57 minutes ago, shERPA said:

Thanks for the comments Luke and MoJo.   Yeah, I'd not be comfortable relying on self-correction at this point.   

My sense of it is that the biggest challenge to doing this thru VCP is actually getting the plan assigned to a reviewer and thru the process.  We have one now at 12 months, not assigned, and another at 10 months, not assigned.   We need a "if you don't hear from us in a year your application is deemed approved" provision. 

Hear you, shERPA, but this is one you could be very confident of getting approved. Have them all adopt retroactively, submit to VCP, and then just assume you have it. The longer the IRS takes, the more difficult it would be for it to do anything other than approve, but I think it is extremely unlikely you'd get pushback in any event.

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I have a similar issue, although complicated by some calculation issues as well.  

Client is 2 brothers – dentists.  When I got their plan, I asked what type of business organization they had. And they said it was a partnership.  Each year I have been calculating their cross tested profit sharing contribution using the IRS’ method for partnerships – ½ FICA and pension contribution reduces their compensation.  Every year, they reported the maximum IRC compensation for the year to start with ($280k in 2019).  Now they are thinking about adding a cash balance plan, and I just found out that each brother also has a S-Corp. and have had the S-Corps all along.  The partnership pays the wages for them and the staff, and the profits flow through their respective S-Corps. 

1.       How should I calculate the contributions going forward – as a partnership or as an S-Corp?  The payroll, including for the owners, comes from the partnership. The accountant thinks calculate it as a partnership, the actuary thinks calculate it as an S-Corp.

2.        How do I fix what has been done in previous years, or is a fix required?

Thanks for your help with this.

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You didn't mention ownership percentages - but I'm going to assume that we're dealing with an ASG between the partnership and the two corps.

1. The compensation that is paid to the two dentists for their personal services is the W-2 income from their respective S-corps - so that is their plan comp.

2. If the correct compensation had been used in past years, would the plan have satisfied all applicable requirements, e.g. 401(a)(4)? If so then no correction is needed. Most likely you are fine, since you were probably using a lower number than their true comp for past years, and having higher HCE comp would typically help testing. 

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that is exactly what happened.  I also called the IRS and was able to get through to a knowledgeable sounding individual who said basically the same thing.  

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