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Would like opinions on this interesting situation.


Guest tpa

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Plan sponsor started a cross-tested plan in August of 1996 and the document was drafted by maximizing the owners and minimizing the nhce's at 5.75%. Upon receiving the year-end census, it was determined that the hce's could hit their maximums and pass at 3% to NHCE's. This formula was utilized for 1996 & 1997. In 1998, the plan was transfered to a different tpa and when the 1998 calculation was being completed, it was determined that there was never an amendment done to the plan to change to the 3% level. What are the issues, options for resolution and potential results(penalties, fines or other) at this point?

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A little more info please. Are you stating that 3% was used for NHCEs even though no amendment was done?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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You should make sure of the correct interpretation of the document. Some documents base contributions on a percentage of pay, and can be scaled upward or downward from that percentage.

For example, a contribution might be allocated prorata based upon 20% of pay for one group and 5.75% for another, but the contribution is insufficient to allocate that, so the percents are scaled back proportionately. Are you sure this isn't the structure?

If this isn't the case, you have a probable VCR candidate, or at least have to make APRSC corrections, depending upon the dollars involved, but it sounds like a VCR case. Get a lawyer's judgement.

If done before audit, the VCR penalty is probably a couple of thousand dollars max (plus it will have to be corrected).

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I presume what you've described is a profit sharing plan.

If however, you have a plan with an explicit contribution for rank & file of 5.75% and an explicit contribution for owners of 25% (thus maximizing their contribution), you've got a money purchase plan. And now, you have funding deficiencies, with penalties (and 5330 filings) and the need to refile old 5500s.

I'm probably wrong (I hope) and that your plan is technically a profit sharing plan. In that case, refer to the other comments in this thread.

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This is a profit sharing plan and the original document was drafted and executed to allocate 5.75% to the NHCE's in August of 1996. When the year end census was received, the actual test passed at 3% to the NHCE's. This occured in 1996 & 1997 with no amendment executed. One recommendation I received was that the plan must fund the difference (5.75% instead of 3%) to the nhce's for the three years in question. If this is accurate, should the contributions be reallocated (moved from the HCE's to the NHCE's to make up the difference?

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Guest michaelv

If the document gives explicit percentages for HCE's and NHCE's, then I'd say you could not take money from the HCE's for the purpose of up'ping the NHCE's to 5.75%. If you did, you'd still violate the plan document because the HCE's would not be maxxed out.

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OK, it's a profit sharing plan.

Here's a suggestion that might work if and only if there have been no benefit payments in the interim. Let me caveat this by saying that I have had informal discussions with the IRS and they disagree with my approach, however.

Assuming that no benefits payments have been made, I would calculate what the allocation of contribution should have been in each of the affected years. I would also recalculate what the allocation of investment earnings should have been in each year. In effect, I would be redoing the allocations for each year, as they should have been done.

This places the plan (and the employee accounts) in exactly the same position as it would have been had the work originally been done correctly. My rationale is that allocations must be done annually; however, I am not aware of anything that prevents one from doing the allocation FOR a given year several years later. Also note that no changes in Form 5500 would be required.

Now this falls apart in several circumstances. If benefits have already been paid based on the original inaccurate allocations, this doesn't work. If benefit staetments had been provided, this probably doesn't work. If the terms of the profit sharing allocation require a specific allocation of contributions to categories of employees (for example, with the new comparability plans), it is harder to argue that the specific allocation can be determined several years after the plan year.

Again, the IRS informally doesn't buy this (I actually discussed this with them in the context of a hypothetical situation involving obtaining revised salary information for past years, but the concept is the same). I haven't had to use this approach in an actual situation, but perhaps this might help.

Richard

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