Missed Deferral Opportunity - How far back do we go

[Santo Gold]

We have a 401k plan that has excluded certain employees when they should not have and as a result, quite a few never were given the opportunity to contribute to the plan.  The plan sponsor wants to go through EPCRS, make the participants/plan whole.  But how far back do they go on this?  The plan was effective back in the 1990s and as far as we know has always excluded a certain group of employees (when they shouldn't have).  Do we have to go all the way back?  Do we go back 3,4,5,or 6 years, go through EPCRS and wait for the IRS to determine if we need to go back further?

Thank you

[Bri]

I think it depends on what sort of relief you want from the VCP application.  (Definitely too long ago for SCP.)

If you're trying to argue that a group of employees were never intended to be allowed into the plan, and you have some documentation/notes to the effect, you might have an argument to ask them to forgive the missed deferrals.

You're telling the IRS where your sponsor messed up and how the sponsor proposes to fix it.  It's on the Service to either accept the proposed fix, or make you go back as far as necessary for them to accept your proposal.  

But if you don't have any evidence as to why they were left out, you might indeed be faced with a mighty amount of makeups.

[Santo Gold]

It was a specific department that was kept out but the document never said that they were.  I was going to go back to 2019 (to get the 25% QNEC rate) for the submission, but that was my real concern, does the IRS arbitrarily decide how far to go back or do we go back as far as we can on our own when submitting to the IRS.

 

[Luke Bailey]

On 8/19/2022 at 12:20 PM, Santo Gold said:

It was a specific department that was kept out but the document never said that they were.  I was going to go back to 2019 (to get the 25% QNEC rate) for the submission, but that was my real concern, does the IRS arbitrarily decide how far to go back or do we go back as far as we can on our own when submitting to the IRS.

Santo Gold, the theory is that IRS in VCP will require correction all they way back to the dawn of time, or at least the founding of the republic. Having said that, if you can show that you have no records that would enable you to determine the magnitude of the violation or the identities of the participants who were affected in the distant past (say 10 years ago) and you really don't have records for one reason or another and are otherwise reasonable in your approach, they will probably work with you. They don't generally require perfect correction where it is not reasonably attainable.

[Ilene Ferenczy]

Santo Gold, there is really more to this than meets the eye.  As was mentioned, if the intent was always to exclude and you can demonstrate that intent in some manner that is not dependent on people's recollections (for example, an SPD that said that these folks were excluded, or perhaps even a powerpoint presentation or letter to the plan administration/document provider that outlines the intent to exclude), you have some basis for asking the IRS to let you amend retroactively.  The key is that the expectation of both the employer and the affected employees must be shown to exist -- so that the employees knew that they were not supposed to participate.  This is really hard to prove.  In addition, the IRS will ask why you went through X versions of the document and didn't fix it before now (the error in document was repeated over and over).

In absence of being able to demonstrate this definitively, you should plan that the IRS will require that you fix this back to the original effective date, as these people are entitled to restitution for the mistake.  As Luke mentions, if data is not available (and that means really not available, not just that you don't want to spend the time), you can use reasonable estimates for earlier years.  But, you can't just say:  we're not going to do it for the earlier years.

Having said all this, you probably want to assess what the risks and rewards are for intermediate corrections and the like.  For this, seek legal counsel who knows how to do this stuff.  You want to make a really informed decision here, assuming that the dollars involved are significant.  This is where the consulting stuff comes in. 

 

Good luck!

Ilene

 

[Santo Gold]

Thanks to all for the above replies.  I have recommended an ERISA attorney for this matter.  It is intimidating knowing that you might have to go back all those years.  Tracking down someone who may have qualified back in 1996 and has been gone from the company over 25 years, just seems almost impossible to capture everything perfectly going back that far.