operational error?

[Guest jfp]

In the past, a 401(k) plan had a one-year service requirement for eligibility for all employees (i.e., 1,000 hours within 12-month period). Years ago, plan document was amended to change to immediate eligibility with no service requirement. However, since the amendment, the SPD has said that there is immediate eligibility for full timers, but part timers must complete one-year of service. I am told that the SPD reflects the employer's intent, but there is nothing to back that up, so I don't think the "scrivener's error" theory works here, assuming that theory is ever viable.

There is a nice match, but no other employer contributions.

Assuming for the sake of argument that no part timer ever questioned the Company about this, has there been an operational error for tax-qualification purposes simply because the SPD and the other promotional literature were wrong? I realize I'm drawing at straws here, but I'm wondering if there is even an operational error if no first year part timer ever made a request to participate.

Assuming it is an operational error, do you think the IRS would consider allowing a VCP correction via a retroactive amendment and WITHOUT corrective contributions? (The retroactive amendment would conform the plan to the SPD.) The cost of correction per EPCRS (i.e., QNECs equal to the ADP and ACP percentages for all affected part timers, plus earnings) would be so huge as to bankrupt or nearly bankrupt the company. Also, the part timers in question are come-and-go employees who almost never satisfy the one-year service requirement, and those who have completed a year of service do not contribute (with some very minor exceptions). Thus, I think we could demonstrate that this would be a ridiculous windfall for the affected part timers.

[J. Bringhurst]

Was the SPD even given to part-timers before their first year eligibility period? The IRS might argue that they did not question the practice b/c they did not know what the literature said.