Employees of ineligible employer (noncontrolled group member) permitted to defer

[Guest calcu]

We have a situation where employees of an employer that is not in our controlled group made salary deferrals into our plan. There is some common ownership, but enough to kick in the controlled group rules. The other employer has not adopted our plan. This happened because of a common paymaster.

Any advice on how to correct this? Evidently, this has been going on since 2000.

[KJohnson]

At are recent conference the IRS was aked a question concerning a situation where under a non-standardized prototype which excluded other controlled group members those other members were actually allowed to defer. The IRS indicated that assuming that the individuals who were improperly allowed to defer were not primarily HCEs, they would alloww a retroactive amendment through VCP, basically makng the plan a standarized prototype, and allowing the other employers "in".

Your situation is a little bit different and trickier. They might still allow you to retroactively amend to form two single employer plans or retroactively amend to form a multiple employer plan (assuming that all of this does not primarily benefit HCEs in some way). Also, I assume that you ran ADP on a combined basis. Before you go to them, you proably want to make sure that each employer would have satsified ADP on an individual basis. Whether they would require you refile 5500's as two single employer plans (or a multiple) etc, I don't know.