Inclusion of ineligible employee

[nancy]

We have a 401(k) plan that allowed an ineligible employee to defer. We plan on amending retroactively to cover the document failure. There are also several other employees who will now be eligible (all involved are NHCEs). Is the only impact of this that they are included in the k and m testing? Are there any contributions to be made on their behalf?

[Tom Poje]

my initial reaction was that

1. you amend plan for eligibility

2. therefore, you have a bunch of NHCEs who weren't 'eligible' to defer and 'should' have been (Exclusion of eligible employees)

3. therefore, under self correction you provide a QNEC as outlined under section 2.02 of APPENDIX B

however, upon reading 2.07 of APPENDIX B, correction by amendment (3)

Inclusion of ineligible employee failure

"....may be corrected under VCP and SCP by using plan amendment correction method set forth in this paragraph. The plan is retroactively amended to change the eligibility or entry date provisions to provide for the inclusion of the ineligible employee to reflect the plan's actual operations. The amendment MAY change the eligibility or entry date provisions with respect to ONLY THOSE ineligible employees that were wrongly included, and ONLY to those inelegible employees, provided (i) the amendment satisfies 401(a) at the time it is adopted, (ii) the amendment would have satisfied 401(a) had the amendment been adopted at the earlier time when it was effective, and (iii) the employees affected by the amendment are predomonantly NHCEs."

interesting. it doesn't say I have to bring in all ineligibles, only those that were wrongly included! the only requirement is to pass a(4), whatever that is to mean.

If this group of ees consists only of NHCEs, and, since you could test using otherwise excludable option, then you would surely pass, as there are no HCEs being let in early. I guess there is nothing wrong to being discriminatory amongs NHCEs.

I think everything I have read on this previously says you have to bring everyone in. however, the above would appear to say you could simply bring in just those extra bodies. that would make it closer in similarity to a corrective amendment under 1.401(a)(4)-11(g)

well, I could be way off on this one. plus it is past my 4:15 limt on Friday.

[g8r]

As Tom pointed out, you don't have to bring everyone in. You can be selective as long as it is nondiscriminatory. You should note that if you are using a pre-approved plan (prototype or volume submitter), then the amendment might destroy reliance unless the amendment is merely selecting options available under the plan. For example, if it's a standardized adoption agreement, you can't bring in just one person unless you modify the prototype - which destroys reliance.

The Rev. Proc. provides the plan amendment as a safe harbor. However, it doesn't preclude other correction methods. Many people would provide for a refund of the deferrals and earnings. Since it's not a safe harbor correction method, you never know whether the IRS would accept it unless you file under VCP. But, based on prior experience, the IRS seems to allow this as a correction method.

[nancy]

As I understand, this can be corrected under SCP and not submitted for a determination letter if I'm adopting a prototype plan. Correct?

[Guest moltengater]

I have a similar situation and am having trouble understanding the necessity to submit for an IRS determination letter. The plan is operating on an approved prototype document. If I amend the plan to allow ALL employees in - thus not picking and choosing - do I have to submit the amendment to satisfy the requirments of SCP?

[rcline46]

Don't forget to read your documents! Many have a correction built in for inclusion of ineligible employee. No amendment needed. Usually a forfeiture of contribution.

Of course er makes ee whole, forfeiture applied to next contribution so everything will be ok.