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plan document incorrectly drafted to have auto enrollment


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I plan sponsor started a new 401k plan in 2020 and gave instructions to the payroll company that a 1 year/1000 hours eligibility requirement to enter the plan was desired.  No auto-enroll.  Someone at the payroll company dropped the ball and did a 3 month elapsed time eligibility condition and included auto-enroll with it.  The payroll company has kind of fessed up to it being their mistake.  We now have several participants with employee and employer dollars in the plan due to the early eligibility and auto-enroll who were never intended to be in the plan.

is this something that can be fixed via an IRS correction program?  The employer would like to treat these individuals as ineligible and refund their 401k amounts if possible all due to mistake of fact.  Other options would included amending the plan to do away with auto-enroll and the 3 month eligibility, but that would help for new employees and would not fix the existing employee problem.  He could also bite the bullet and keep everyone in the plan, but terminate the plan and pay them out.  But that would mean he could not start up a new plan until at least 2023 and he would like to have a plan in place without disruption.

Thank you for any replies.

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You can self-correct this. I would first, immediately stop the contributions at the payroll provider. Then, have the mistaken 401(k) contributions distributed to the employees. Use code E for the 1099-R. This will get the correct tax treatment, since (assuming the contributions were withheld pre-tax) they would have already been taxed for FICA, but not for income tax. The code E will get it included in income tax for the current year. They will get taxed on any gains, but I think that is inevitable. Hopefully they didn't have any losses.

The mistaken employer contributions will probably have to stay in the plan. Move them out of the participant accounts and into a suspense account. Use the suspense account to fund other employer contributions until it is depleted.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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First - just another example of why using a payroll company as your 401(k) provider is a BAD IDEA.

Second - although not clearly stated, it sounds as if the plan document was drafted with the incorrect undesired provisions and then would have to have been signed by the plan sponsor, so they have culpability as well if that is indeed the case. If so, there is only correction going forward. There is no operational defect following plan provisions, only poor judgment and poor service from all the responsible parties in not executing the intended plan.

If the document was not followed, then making corrections by returning improper withholdings and forfeiting unentitled employer contributions is a proper correction.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Sorry, it was clearly stated in the heading - document not drafted correctly. I think your stuck with what's been done, unless it's an auto enroll where the employees can opt out after the fact, and they do so.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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CuseFan, thanks for pointing out that the document issue was stated in the title. It's easy to miss that when reading the question.

Given that, I agree that what's been done is most likely correct per the plan document, and the plan document controls. The sponsor can eliminate the auto-enrollment provision prospectively, and change the eligibility requirements going forward, but that's about it.

If the recordkeeper admits to screwing up, then you could maybe try to get them to pay for a VCP submission to ask the IRS to allow the correction I mentioned in my earlier comment. They should come prepared with some pretty strong evidence that the provisions they intended to adopt and what was communicated to participants was not what was in the document. They should also be prepared to explain why they didn't read what was in the plan document that they signed. I wouldn't give this a good chance of success, but they might get lucky.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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53 minutes ago, CuseFan said:

In addition to a slim chance for your desired outcome, you're likely waiting 18-24 months to find out. 

Doesn't the new epcrs provide for telephonic discussions?

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5 hours ago, Mike Preston said:

Doesn't the new epcrs provide for telephonic discussions?

It does, but that's only for a non-binding pre-submission discussion in which IRS would likely be able to tell you whether your desired solution (here a retro plan amendment and undo) was likely to fly or not. Note that 18 to 24 months may be a little pessimistic.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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22 hours ago, Mike Preston said:

Doesn't the new epcrs provide for telephonic discussions?

Sorry - not all 100% up on EPCRS because I don't make mistakes needing it - LOL - Friday humor! Thanks for pointing out.

17 hours ago, Luke Bailey said:

Note that 18 to 24 months may be a little pessimistic.

Apologies to IRS, but until we routinely see timely EPCRS/VCP resolutions on the model corrections I'm not holding out hope for faster closing of custom situations.

I'm curious to hear from our community on their VCP timing experience over the last few years, although maybe that's not fair given the COVID variable.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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4 hours ago, CuseFan said:

I'm curious to hear from our community on their VCP timing experience over the last few years, although maybe that's not fair given the COVID variable.

9 to 12 months for non-model large case fairly recently.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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