Kevin C

If the amounts allocated to participant accounts for 2022 and 2023 fit within the allocation formula and other plan provisions in effect for 2022 and 2023, there was no operational failure and there is nothing to correct.

Unfortunately, this problem goes way back. I had a client that had this happen two years in a row about 10 years ago. Got a 2848 signed and waited on hold for a live person. That took care of the issue and even got an apology. But, the damage was already done. Even if it's a mistake, no one likes getting a penalty letter from the government. After receiving the second letter, their Board started looking for a new TPA and moved the plan. I contacted ASPPA about it at the time. They went to the IRS about it, but not much changed. Most of our clients received the letter "approving" the extension of their calendar year 2021 returns around the first of November. I haven't heard of anyone receiving penalty letters yet.

As you noted, since the plan is under examination by the IRS, SCP is only available for insignificant operational failures. The IRS agent will decide if it is insignificant. I would try suggesting your plan in your first post. If they don't approve it, I would probably suggest removing the ineligible people from the plan as an SCP correction. The IRS usually wants amounts left in the plan, so that might encourage them to reconsider your first option. If they don't let you correct under SCP, you will be under audit CAP. Best case for the Audit CAP sanction Is the amount the VCP filing fee would have been. It may be higher. Good luck.

You aren't missing anything. There was a fairly long thread on this back in late 2018, with the same conclusion.

The regs allow extending the length of the loan beyond the original 5 year period if certain conditions are met. There are two options, yuck and double yuck. See 1.72(p)-1 Q&A 20 (a)(2). ASC's cycle 3 401(k) document includes an optional loan program that allows restrictions on loan renegotiations, provided the ability to renegotiate is available on a non-discriminatory basis. It also has an optional to not allow renegotiation.

The only exception to the three month plan year requirement in the Regs is for a newly established employer.

There are a couple of places. Deferrals can only be made from Section 415(c) compensation and deferrals including catch-up can't exceed Section 415(c) compensation. And

The reg section you cited is below. The example should be helpful. In short, if the lump sum available after the amendment is available with the same timing (and other terms) as the partial distribution, the removal of the partial distribution doesn't violate 411(d)(6). Likewise, if the lump sum after the amendment is available with the same timing as the the start of the installment payments being removed, the removal of the installments doesn't violate 411(d)(6). In most cases, the lump sum and other optional forms of payment are already available with the same timing and under the same terms, so eliminating the other optional forms of payment is not a problem. Of course, if the plan has any money purchase amounts in it, they can't eliminate the annuity option for those MP amounts.

If you're looking for a cite, it's:

Is the participant an HCE in the plan paying the refund? There is a discussion of this in one of the Asked and Answered in the Qualified Plan eSource on ERISAPedia. If you search for QA2986, then scroll down a bit, you'll find it. The gist is that if an HCE receives a higher rate of match after the refund, you have a BRF problem unless the match based on the refund is forfeited. The plan may provide that it is forfeited even if it isn't discriminatory.

I agree common sense doesn't always apply to plan rules. But, in this case, I read the Code as agreeing with you.

It's not dealing with 404(c), but the DOL has published a less than favorable opinion of self directed plans that only provide a brokerage window in their fee disclosure guidance. From FAB 2012-2R Q&A 39: "... Nonetheless, in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary's failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raises questions under ERISA section 404(a)'s general statutory fiduciary duties of prudence and loyalty. Also, fiduciaries of such plans with platforms or brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan are still bound by ERISA section 404(a)'s statutory duties of prudence and loyalty to participants and beneficiaries who use the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement, including taking into account the nature and quality of services provided in connection with the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement." Field Assistance Bulletin No. 2012-02R (1) | U.S. Department of Labor (dol.gov)

I agree with FtWilliam's analysis. The cited reg section has not changed since that was written. It refers to a limitation on "matching contributions" for HCE's. Other sections of the reg refer to "safe harbor matching contributions" and "qualified matching contributions". I don't think the reference here to "matching contributions" was accidental. From the article:

There is a way to have a safe harbor contribution deposited after the Section 415 deadline counted as an annual addition in the prior year. Corrective allocations under EPCRS are treated as annual additions for the year they relate to, not the year of deposit. Rev. Proc. 2021-30 6.02 (4)(b). Note, this only applies to required contributions. If you don't feel that having a 2020 safe harbor treated as a 2021 annual addition is something that warrants correction, have them deposit on 1/1/22 or later.

The answer to your question will be in either the plan document or the amendment terminating the plan. What do they say?

You need to contact the Department of Labor. You can get contact info for your regional office here: https://www.dol.gov/agencies/ebsa/about-ebsa/about-us/regional-offices

Eventually a participant complains to the DOL and they make the plan sponsor do the correction. At least, that's what happened to one of our clients who refused to deposit two years of safe harbor match.

perkinsran, your plan document should have language that complies with this. It is probably part of the eligibility requirements. Otherwise, excluding part-time employees will disqualify the plan.

The correction methods listed in the EPCRS Rev. Proc. are pre-approved correction methods. Other correction methods can be used provided they are reasonable and appropriate [Rev.Proc. 2021-30 6.02(2)]. "Reasonable and appropriate" is a facts and circumstances determination. Also keep in mind that the correction method used must be applied consistently to the same type of failure for the plan year. [6.02(3)] So, if the client wants to provide 100% of the missed deferral, is that reasonable and appropriate? It's a judgement call. If the only ones receiving the correction are HCEs, I think it probably isn't. If it's only going to NHCEs, I think it is. Of course, the IRS can second guess your correction if you use something other than a correction listed in the current Rev. Proc.. The percentage of missed deferral to deposit listed in EPCRS has changed over the years. Prior to Rev. Proc. 2006-27, the IRS pre-approved correction was to use 100%. So, at least at one point, the IRS thought 100% was reasonable and appropriate. Also, you aren't required to use the safe harbor correction of 25% if it applies. You could use the other listed correction of 50% and still be using a pre-approved correction method.

I read that as prohibiting deferrals from compensation paid after the Effective Date of Plan Termination. The standard termination amendment language hasn't been approved by the IRS, so it can be changed. A revised last sentence would make it clear. "Furthermore, in determining any contributions prior to the Effective Date of Plan Termination, the Plan will not take into account Compensation for services rendered paid after such Effective Date." If the transaction will occur between 8/31 and 9/9, changing the effective date to after the transaction date probably isn't an option.

Since the 3% SHNEC is required to use a 414(s) compliant compensation definition, it will need to be amended. An -11(g) amendment is treated as if it were adopted and effective as of the first day of the plan year [1.401(a)(4)-11(g)(1)], so it works if the amendment is adopted by the 15th day of the 10th month following the end of the plan year [(1.401(a)(4)-11(g)(3)(iv)]. If you have access to the IRS Q&A session handout from the 2012 ASPPA annual conference, this situation was question 39.

Is it a safe harbor plan?

It doesn't look like anyone wants to answer, so I'll give it a try. If the HCE was eligible for the contribution when it was deposited and the employer followed the terms of the document when it was deposited, I think a later application of employer discretion to remove the previously allocated contribution violates the anti-cutback rules of Section 411(d)(6). See 1.411(d)-4, Q&A 4. Our document requires the employer to designate in writing the amount of contribution for each allocation group. That's in the DC LRM's so I would expect your document to have the same requirement. The contribution in your question was allocated, so it appears the employer provided instructions about the allocation. So, based on the details provided, I think they can't do that. Going forward, they should either allocate the contribution after the end of the year or change their policy.

Your base document may address distribution timing after Retirement. Our's says "Distributions to Employees may be accelerated upon special circumstances, such as termination after attainment of Normal Retirement Age or other special circumstances, provided such acceleration does not cause the Plan to violate the nondiscrimination rules under Code §401(a)(4) and the regulations thereunder."

How long were they improperly excluded? Rev. Proc. 2021-30 Appendix A .05 (9) has safe harbor correction methods that apply if you follow the requirements listed for (a) exclusions not exceeding 3 months and (b) exclusions not extending beyond the SCP correction period for significant failures (which was extended).