Curing coverage issue in Target Benefit plan

[chris]

Employer does not make full contribution as required under MPPP document. Employer does, however, make a partial contribution. MPPP does not pass 410(B). If employer contributes the remainder, files Form 5330, and pays the 10% tax associated with the underfunding, will the 410(B) coverage issue be solved?

The plan in question is a target benefit plan. Employer paid premiums on insurance for 3 HCE's but not on 2 NHCE's who were also participants in the plan. Employer says MPPP was terminated in 1997 and that payroll employee just kept paying the premiums as the bills came in. No 5500's filed since 1996. Now the IRS has sent notices regarding some of the 5500's.

Employer adopted a standardized prototype maintained by an ins. co. in 1987. The opinion letter does not consider TRA '86. Doesn't appear that the plan is eligible for voluntary correction programs under Rev. Proc. 2001-17. Thus, thought was to at least get contributions made up through year of termination, file requisite 5330's (and pay the 10% or whatever applies), file all outstanding 5500's and then go from there...?? Any comments or suggestions?

[AndyH]

There are obviously a lot of issues here.

First, if the plan was a standardized prototype, there is no 410(B) failure. Everyone except those terminating with less than 501 hours are in the plan, whether or not contributions were made for them.

The contribution problem is separate. It sounds like there are accumulated funding deficiencies.

I think the client should first get an ERISA attorney because some negotiations will be required with regard to the necessary document corrections, and the unpaid contributions (at least!) Then the contributions are made up, and the excise penalties are paid. At the same time, determine what steps were taken as part of the "termination", i.e. what actions were taken.

If benefits were paid out without the proper steps having been taken to terminate the plan, the problems compound, and you'll need the attorney's guidance for that.

The fact that it's a target doesn't by itself alter anything. The same issues would apply to a regular money purchase plan.

I've covered at least some of the issues. Perhaps someone else can elaborate.

[chris]

Thanks for the reply, AndyH.

Nothing has been paid out of the plan on account of the "termination". Employer just stopped contributing, except for the premium payments for the ins. policies held by the plan on the lives of the HCE's.

The coverage issue arose as to whether the NHCE's "benefit" under the plan according to the way that term is defined in the Regs. under 410. The current TPA was reluctant to complete Line 21 on the Form 5500 to be filed for the PYE 12/31/97 on its assertion that the plan failed 410(B).

In light of your reply I did a little research. Regulations Sec. 1.410(B)-3(a) states that "an employee is treated as benefitting...if...in the case of a defined contribution plan, the employee receives an allocation taken into account under Reg. Sec. 1.401(a)(4)-2©(2)(ii),... Regulations Sec. 1.401(a)(4)-2©(2)(ii) states that"...In the case of a defined contribution plan subject to section 412, an employer contribution is taken into account...even if all or part of the contribution is not actually made."

As to the document issue, the ins. co. says that employer not entitled to use its prototype as of last date it or its authorized representative handled the administration of the plan. That appears to have been 1996. Even so, no amendments were ever made for TRA '86, and following, by the authorized representative. Either way, the document issue will be addressed in the VCP filing.

Thanks in advance for further comments or suggestions.

[AndyH]

So, it seems that we've narrowed the issues to (1) contributions and associated penalties owed, (2) document problems, and (3) possible 401(a)(4) violation under benefits, rights, and features on account of maintaining insurance on only some participants.

Sounds more manageable through the voluntary corrections progam than it did before. I'd start by getting the contibutions straightened out.

[chris]

Despite the fact that the employer is saying the plan was terminated in 1997, it will be treated as an "on-going plan" by the IRS since the assets have not been distributed. My intitial guess would be that the termination did not also involve a freezing of the plan going forward. As such, and given that the HCE's received some type of contribution since 1997, it may be that employer corrects by including employees who were impermissibly excluded from 1997 going forward?? From the records I have seen that appears only to have been one or possibly two other employees (both of whom are NHCE's).

[AndyH]

Yes, unless the plan was frozen, that's correct, regardless of whether contributions were actually made or not, and regardless of for whom they were made.