Early inclusion in the plan

[JPIngold]

I have a client that let a new employee enter the plan before meeting the eligibility date. I know EPCRS allows the plan to be retroactively be amended to waive the eligibility conditions as long as it meets the conditions of EPCRS. However, they don't want to do this because it would trigger a top heavy contribution for the employee.

Can we claim that her 402(g) limit with respect to this plan was zero and process a taxable distribution as a corrective distribution for exceeding the 402(g) limit or do we have to return the money to the employer and have them make her whole? The problem with that is dealing with payroll taxes as it would be taxed a second time if you process a taxable bonus.

Anyone do something different?

Thanks.

James

[CuseFan]

A retro amendment to allow early entry is permitted, not required.

The plan may contain language already regarding the treatment of an employee mistakenly included, but I think a return of deferral contributions plus income and forfeiture of any employer contributions is perfectly acceptable.

[chc93]

1 hour ago, CuseFan said:

A retro amendment to allow early entry is permitted, not required.

The plan may contain language already regarding the treatment of an employee mistakenly included, but I think a return of deferral contributions plus income and forfeiture of any employer contributions is perfectly acceptable.

Interesting... I thought this wasn't an acceptable solution.  We've always amended the plan for the specific year to allow the earlier entry.

[Luke Bailey]

3 hours ago, chc93 said:

Interesting... I thought this wasn't an acceptable solution.  We've always amended the plan for the specific year to allow the earlier entry.

You can always enforce a plan's written terms and undo erroneous operations.

[Larry Starr]

On 9/17/2019 at 5:55 PM, JPIngold said:

I have a client that let a new employee enter the plan before meeting the eligibility date. I know EPCRS allows the plan to be retroactively be amended to waive the eligibility conditions as long as it meets the conditions of EPCRS. However, they don't want to do this because it would trigger a top heavy contribution for the employee.

Can we claim that her 402(g) limit with respect to this plan was zero and process a taxable distribution as a corrective distribution for exceeding the 402(g) limit or do we have to return the money to the employer and have them make her whole? The problem with that is dealing with payroll taxes as it would be taxed a second time if you process a taxable bonus.

Anyone do something different?

Thanks.

James

RTFD and tell us what language you have in the plan that deals with this issue (if any).  Then, if you find that language, you follow it if the client doesn't want to amend to make it "good".

[JPIngold]

I did read the document and it says to apply the principles set forth in EPCRS. EPCRS states that the operational failure "may be corrected by using the plan amendment correction method". I guess I was interpreting that to mean I have other options. If it said "shall be corrected" with a plan amendment, I would feel like I don't have a choice. Maybe I am reading it too literally.

 

[chc93]

5 hours ago, JPIngold said:

I did read the document and it says to apply the principles set forth in EPCRS. EPCRS states that the operational failure "may be corrected by using the plan amendment correction method". I guess I was interpreting that to mean I have other options. If it said "shall be corrected" with a plan amendment, I would feel like I don't have a choice. Maybe I am reading it too literally.

 

Interesting... I read this to mean that you "may" correct by plan amendment, and if you don't correct by plan amendment,  then you are not in compliance.  Not that if you don't correct by plan amendment, you can correct by other means... unless the plan document allows.

[Luke Bailey]

5 minutes ago, chc93 said:

Interesting... I read this to mean that you "may" correct by plan amendment, and if you don't correct by plan amendment,  then you are not in compliance.  Not that if you don't correct by plan amendment, you can correct by other means... unless the plan document allows.

chc93, you are reading it as if it said "you may only" and the others (including me) are reading it as "you may or may not." Outside of a particular context, "may" is inherently ambiguous. Your superior tells you, "You may go now." That's a command. A child finally convinces his or her parent to let him or her stay out late at a concert, and the parent says, "OK, you may go," and probably the child is correct in concluding that it's OK also not to go.The Merriam-Webster on my iPhone does offer, "SHALL, MUST" as "used in law," but it is the fourth definition given and applies where the "sense, purpose or policy requires this interpretation." Given that EPCRS generally allows retroactive changes in plan operations to conform them to the plan's written terms, and allowing retroactive amendment is more sparingly applied, I don't think that the "sense, purpose or policy" requires the "shall, must" interpretation here.

[Larry Starr]

18 minutes ago, Luke Bailey said:

chc93, you are reading it as if it said "you may only" and the others (including me) are reading it as "you may or may not." Outside of a particular context, "may" is inherently ambiguous. Your superior tells you, "You may go now." That's a command. A child finally convinces his or her parent to let him or her stay out late at a concert, and the parent says, "OK, you may go," and probably the child is correct in concluding that it's OK also not to go.The Merriam-Webster on my iPhone does offer, "SHALL, MUST" as "used in law," but it is the fourth definition given and applies where the "sense, purpose or policy requires this interpretation." Given that EPCRS generally allows retroactive changes in plan operations to conform them to the plan's written terms, and allowing retroactive amendment is more sparingly applied, I don't think that the "sense, purpose or policy" requires the "shall, must" interpretation here.

Agreed.

[chc93]

Luke, thanks for your explanation... and thanks, Larry, for also commenting...

[Scott50]

Why not do a negative contribution, call the service provider and explain what you did and why.  Most of the service providers prefer this action.

[JPIngold]

The problem is we are 8-2/3 months after the plan year. If we return the excess to the employer via a negative contribution, they would need to process a taxable payroll to the employee for 2019 (which would be right for federal and state tax purposes), but it would cost FICA and Medicare again (unless you could get the payroll service to label it as non-taxable for FICA and Medicare.