401_4_ever

Yes. You'd have to pass coverage seperately, and you may have to start running 401(a)(4) testing as well. In the case of a match, you'd also impact ACP testing. None of those would be an issue if it's HCE's you are excluding.

I'd treat it is a plan overpayment outlined in EPCRS. Yes, they should make reasonable efforts to recover the overpayment. I don't think EPCRS requires an earnings calc but I haven't done one of these in a while so I'm not positive on that. Most trust companies & recordkeepers can recover withholding if it doesn't cross tax years -- so since this is a 2006 ADP test, I'm assuming the tax was withheld in 2007. That shouldn't be a problem -- and the 1099 isn't issued until January of 2008 so that also shouldn't be an issue. Even if you can't recover the withholding, this can be reflected by amending the participant's tax return, if they included it on their 2006 return.

In my opinion that solution is not anywhere within the spirit of EPCRS and I would love to see a single cite that supports it. Section 2.02 of 2006-27 includes partial year exclusions of an eligible employee under the corrections method of 50% of the participant's ADP rate. If there are 9 months or more during the plan year left for the employee to increase their deferrals, it indicates no correction is needed. Additionally, it is illegal in some states for an employer to require an employee to pay back compensation paid to them. This is particularly true when the money has already been through payroll.

Just thinking out loud here, but how about the loss of the tax benefit to the participant? Also I would think any proveable investment income the participant would have had is available.

I am looking at a plan that had a QDRO come in that the plan qualified. The terms of the QDRO was that the benefit of the alternate payee is not distributable until the participant turns retirement age. (In my opinion, poorly drafted). Despite this knowledge, the PA went ahead and processed a rollover to the alternate payee. Despite it being rolled over, the participant cashed the check (the check was made out to the IRA institution for her benefit, and some bank cashed it into her checking account). While the QDRO didn't support the distribution, the Plan Document is a prototype document that permitted it. Question 1 -- Is there any guidance that states the distribution is OK since the document supports it? (i.e. can the document override the qdro?) Question 2 -- If not, what is the correction method? I'm thinking this is an overpayment under Section 2.05 of the ECPRS -- which means (1) the PA makes reasonable efforts to get the money returned and (2) if it is refused to be returned (where we are now), the PA makes the contribution to the suspense account to be used for future ER contributions.

I'd like to hear what everyone else thinks, but I'm thinking the only way is to do a retroamend via the VCP program. If the document allows it, you might be able to forfeit the money and then allocate it as a QNEC or QMAC.

Has anyone ever heard of a plan that is able to condition the form of distribution based on the terminated employee's willingness to sign a non-compete clause with the employer? This plan states if you sign a non-compete clause you can have a lump-sum payout, but if you don't sign it, you have to take an annuity payment only. Seems to me to be violating the contingent benefit rule, but the plan claims to have a determination letter on it.

I agree. You'd also have to prove to a court that the Key Employees actually would have stopped deferring. Looks like a lot of Monday Morning Quaterbacking to me.

While the audit cap process is a "negotiation" the consequence of not reaching an agreement is usaully plan disqualification.

P.S. delivering a top heavy report in March 2007 for the 2006 plan year based on a 12/31/05 determination date IS standard practice.

Agreed. At worst the TPA would be liable for the lost earnings & penalties. I'm not following how the TPA would be on the hook for the actual TH contribution either. Not many plans in the industry run mid year TH tests.

If you go with 50% or 100% of the election, are you re-doing testing? The benefit of the EPCRS creating the lost oppourtunity cost was to avoid re-doing testing. (50% of their groups ADP rate). While you may think the employer doesn't have an issue here, there is still an operational failure here. Having idiots for employees is not an excuse for an employer failing to follow the terms of their own plan document.

You can't do a retro-amend via self-correction. VCP only.

See Rev Proc 2006-27, under exclusion of eligible employees. An EPCRS program is needed.

I've treated this is an exclusion of eligible employees and done 1/2 of ADP rate as per the EPCRS. This is based on the assumption that the employees were made whole in their paychecks. I should note the board is split on the issue of whether to use 1/2 of ADP rate, or the full missed deferral given the exclusion of an eligible employee when there is a valid election (and presumedly the auto-enroll is a valid election). The EPCRS examples only addresses someone without an election at all. The board is split about what to do for if there is a valid election. I think 1/2 of ADP is appropriate since they have been made whole through their paycheck. Additionally the EPCRS revenue procedures list the 1/2 of ADP rate as a reason to not re-do testing. Finally, it calls the 1/2 ADP rate the missed oppourtunity cost, and I don't think the missed oppourtunity is different. Others believe since you know how much they would have deferred, the missed oppourtunity would be needed. You have to think about re-doing testing if you go that route.

Yes, adopting the amendment isn't enough. Yes, they have to do a VCP for non-amender. It's not worth risking whether or not the IRS will catch it with their EGTRRA restatement. (But if it's a prototype or volume submitter, they won't catch it).

I ran into this and treated it as an exclusion of eligible employees, for which there is correction methods.

Why not do a VCP submission with a retro-amend to remove the controlled group from the document? I have done that in a VCP submission and it is has been approved. That's a relatively common method of correction for this type of failure. If I were an IRS agent looking at a retro-amend making a 1,000 eligibility for Temporary employees only, I would think that would be highly discriminatory, and wouldn't approve it. That's just me though.

The two reasons your numbers could be off which I thought of: Are you matching on the catch-up? Is your system adjusting for earnings (or in this case lost earnings)?

Interesting, because I've heard of the DOL auditing plans for which they've denied a VFCP application for...

Agreed, time passing doesn't fix this problem. I had a similar situation to the original part of the problem -- plan restated to a prototype and controlled group were included. When we caught it a couple years later, we did a VCP submission with a retro-amend excluding the control group. The VCP got approved...Maybe that could work here?

The way I've handled this situation is to sweep it into a suspense account & make the participant whole outside the plan.

VCP with a retro-amend. Pray once the IRS gets the VCP they don't deny it. Run, don't walk to an attorney.

I'm thinking, yes that is an exclusion of a participating employee. It would create an operational failure. The correction method would be an employer contribution on behalf of the employee. I don't think that situation is any different from the participant who fills out an election form, and the PA never actually starts the deferral process. Anyone disagree?

This point has been vigourously debated on many earlier posts. Half the board believes this is an exclusion of otherwise eligible employee and a full correction is needed. The other half believes it's the employee's responsibility to monitor their paycheck. There is unclear guidance from the IRS, as guidance only addresses what happens if there is no actual election to defer. What does your plan document say? It likely created an operational failure...