What is "egregious"?

[Guest djsimonetti]

Anyone aware of any guidance as to the mening of this term as used in 4.08 of 2003-44? The examples in the Rev Proc both involve practices that are discriminatory as well as "bad". Do you think that an element of discrimination is necessary to characterization as egregious? Stated differently, is a "bad" failure (e.g., failure to make required contributions) egregious if the parties affected include ALL participants?

[SoCalActuary]

A plan sponsor who chooses not to make a required minimum funding payment after being properly informed is making a willful decision.

If the plan sponsor does not request a funding waiver, this would be egregious in the minds of many. "Failure to operate the plan as written" is a favorite target of auditors, even if it is not strictly a discrimination issue.

Can you give us more info? Is this a DC plan with required contributions, such as a required TH minimum, or a required match? Is this an auditor's assertion after reviewing the plan operation?

[Guest djsimonetti]

Thanks for the input. The plan is a discretionary profit sharing plan. The employer took deductions for contributions that were made after the due date or which have still not been made. The TPA issued participant statements reflecting the contributions as having been made even though they were still "receivables". Personally, I'm not convinced that the taken deductions or the participant statements convert the discretionary contributions into required contributions so that the failure to make them constitutes an operational failure to the same extent as it would if we were dealing with a pension plan. Nevertheless, in order to avoid having to issue revised participant statements and dealing with outraged employees, the employer wants to make the contributions with earnings, pay the VCP fee and get on with life. I am concerned that the IRS might consider this "failure " to be "egregious" because the late or unmade contributions foe three years aggregate >$1.5 million. That would throw us into audit cap where the potential fee could jeopradize the emplyer's existence (especially in light of its obvious tax return problems).

[SoCalActuary]

Failure to contribute timely in a discretionary PS plan, hummm?

The IRS could take the position that the contributions did not exist, and the late payments were for the following year, based on the next year maximum deduction rules. If I were auditing, that would be my position.

You also have a potential civil issue. You issued statements to participants with incorrect information on their benefits.