SCP - Past 2 year period. What now?

[fiona1]

ADP test for the 2000 plan year failed - but it was never corrected. Correction should have been made by 12/31/01.

Self Correction Program allows QNECs and One-to-One contribution to correct the operational failure - but only by the end of the 2nd plan year following the year in which the failure occurred. Meaning, the SCP deadline was 12/31/03.

Any thoughts on where to go from here?

[Tom Poje]

well, then I believe you have VCP or hope the plan never gets audited.

[mbozek]

Q: what happens if the plan is audited after the s/l expires (assuming calander year plan with tax return due 3/15/01)? IRS cant disallow the 00 deduction.

[KJohnson]

I think the IRS takes the position that when a disqualifying defect occurs, the disqualification taints all future plan years until the defect is corrected-- even if the defect is in a closed year. I have a cite--which I haven't looked at...Martin Fireproofing Profit Sharing Plan v. Commissioner, 92 T.C. 1173 (1989). Of course whether they would even ask for the records of a closed year is another question.

[mbozek]

The case also hold that the filing of a Sked P eliminates liability after the s/l expires. Also under the Estate of King, the determination that taxation occurred in a closed tax year prevents the IRS from assesssing taxes against the participants in a later year year when the mistake is discovered.

[KJohnson]

I think the IRS would acknowledge that they couldn't take any action in a closed year if a schedule P were filed. Their argument woudl be that they were not doing anything in a closed year but that a uncorrected defect from a closed year means your plan is disqualified in the subsequent open year. Thus they would not be going after taxation in a "closed year." Luckily, I have never had to look too far into this so I don't know how strong their position is. You might very well be right that there are defenses.

[mbozek]

It seems that there are two solutions to the problem- remove the excess contributions and interest from the plan or wait until the s/l expires for assessing taxes.