Is this plan FUBAR?

[goldtpa]

I just picked up a new client. I looked at the document and the document which was signed 9/01 and defines comp as w-2. The only problem is that the owners don't get w-2s, its a partnership. All income is reported on the K-1.

The other issue is that the eligibility period for the 401(k) is 21 and 1 yr. In order to get a ps contribution there is a 2 year wait and secretaries are excluded. The problem, over half the ees are secretaries. I doubt it will pass the 410(B) coverage test.

The profit sharing contribution is cross tested. The plan doc, calls for a 3% contribution for all ee's in Class II. The partners in Class I get whatever % will pass the test. The plan as written doesn't pass the allocation gateway test. The plan may be a GUST I, but EGGTRA was not done.

Can this be self corrected or do they have to go to the IRS?

:confused:

[Lynn Campbell]

Is it too late to tell the client you will not be able to take this Plan? Why sign up for problems?

[Mike Preston]

Most plan documents state that if someone is self-employed then instead of W-2, you use earned income. Are you sure your document doesn't say that?

If the plan has 2 year eligibility, then you do testing under 410(B) based on two year eligibility.

If the plan doesn't satisfy the tests for 2002, you have plenty of time to do an -11g amendment.

[goldtpa]

The plan clearly states in the adoption agreement that the comp is defined as w-2. I would have to look at the basic plan doc.

My gut feeling is that they ran the plan in 2001 with the secretary exclusion and my gut says that it didn't pass.

Hopefully i am wrong. The last thing I need is a headache

[Mike Preston]

Tis my day for suggesting that people read the plan document, I guess. Let us know what you find in there on the compensation issue.

If they ran it in 2001 on a basis that does not satisfy 410(B), you still have plenty of time to correct by amending the eligibility, retroactively, so that the plan covers a non-discriminatory group.

[jaemmons]

I don't think you have a problem with the plan's definition of compensation, as a self-employed individual's comp by definition under IRC 415©(3) is earned income.

IMO, the exclusion of the secretary group, may be a demographic "error" (assuming the plan fails coverage) and would need to be corrected under the VCP General program under Rev Proc 2001-17, whereby a corrective amendment can be done and a formal application to the IRS is made. Should the plan fail 410(B) due to the exclusion, it becomes a demographic issue, as the plan's qualification error was due to a plan provision. The plan is being operated as it is written, so it does not seem to qualify as an operational "error" which may be corrected under the self correction programs under VCS or VCO programs as described in Rev Proc 2001-17.