ADP failure back to 2001

[K-t-F]

A plan sponsor was referred to me today asking if there is an easy way to fix a failed ADP which his payroll service and plan administrator just notified him of recently. Here is the situation:

- straight traditional 401K... no match... no ER contribution

- 14 EEs including himself

- participation: One NHCE, and himself (No payroll info yet to determine who was eligible to participate)

I think the best case scenariois that he has failed the test just barely each of the preceding years. The payroll company told him it will cost him $50K to make the plan right.

My question is... can he go back and withdraw from the plan the over deferral for the years he failed instead of contributing new $ to a plan he really doesnt want. Amend the form 5500s and move forward from there? Is there a specific correction under VFCP?

I know this is vague... simply trying to find out what some options are to suggest when I go to collect information and really see what the issues are.

Thanks

[Guest mjb]

Could you please explain what caused this error and why it was not discovered for 5 years? Is the 50k the amount necessay to make a minimum 3% contribution for a TH plan for 5 years for all NHCEs? What about fixing 2006?

[Tom Poje]

it sounds like something is missing - if you 'just barely failed' and now are at $50,000 to fix?

if HCE was at max comp amount, then using comp less deferrals might pass testing (again, if it barely failed then it might pass)

look at Appendix B of EPCRS

Section 2 .01 ADP Failure

1.(a) correction is QNEC via Appendix A .03

(b) one to one correction - return $ amount plus gains, contribute similar contribution (either to those ees from year in question or (if I remember correctly) the employees in the current year.

now, can you argue the failure is insignificant and therefore eligible for complete correction under SCP? or is it safer to go through VCP. without more facts....

[K-t-F]

Information still coming in..... After a phone call and some faxes it appears the $50K is TH requirement.

[Guest Pensions in Paradise]

Time for him to hire an attorney and go after the folks who previously administered his plan.

[K-t-F]

Paychecks .... and I was thinking outloud with him today regarding that thought.

I will post all the info soon and ask what everyone thinks is the best approach. Honestly, I have never had to file under any volunteer compliance program for my plans. One reason I enjoy the niche market I am in.

[Guest mjb]

Before you take PPs ill informed advice and lead the client down the wrong path (and have him pay a lawyer to pursue a hopeless case against a well financed defendent), review the documents and materials provided to plan sponsors regarding their responsibiities. Many Ptype sponsors disclose the requirement to make 3% contributions for non key ees in the materials provided at time of adoption but the sponsors dont read or understand this requirement. Also see what services the client was paying for - the client may only retained the firm to perform specific services such as a ADP testing and recordkeeping. Need to read the service agreement. The client can make a business decision to ignore the contributions for past years TH minimum and only make corrections beginning with 2005 or 6. There is a risk but client may not be able to afford ponying up 50k + plus penalites.

[Guest Pensions in Paradise]

mjb - could you please provide me with the primary source material which supports your statement that "the client can make a business decision to ignore the contributions for past years TH minimum and only make corrections beginning with 2005 or 6." How can the client not correct for all prior years?

[Guest mjb]

As I stated in my post (I thought it was obvious) this is a business decision to be made by the client, not legal or tax advice. Clients can disregard the advice of counsel and elect to only make the contributions going forward even though the qualified stratus of the plan is at risk. Clients only have to pay for advice, they dont have to take it.

[K-t-F]

I intend to review the past years to make sure Paychecks is accurate. I also will post my findings to see what you, my constituants, think might be the best course of action.

The adoption agreement is as vanilla as can be. The services agreement between the plan sponsor and Paychecks has yet to be seen (by me). I was told by the sponsor that he only received one letter and one phone call which was recent to alert him of the TH requirement. The sponsor does not deny he should have taken a more diligent role running his plan. He is frustrated that there is not an easier way to make this problem go away. He is also frustrated that this plan design was suggested to him considering the participation of his EEs (a SH match would have been the way to go)

Any other comments are certainly welcome!

Thanks

[K-t-F]

The plan sponsor has decided to let the payroll company dictate to him how to correct this problem. His question to me is....

If the plan is audited down the line and it is found that the the correction was done incorrectly, what will the fines and penalties be? I am assuming that the plan would be disqualified so what will he be looking at in the way of fines and penalties?

Is there an IRS notice explaining fines and penalties?

Thanks.

[Tom Poje]

one other thought comes to mind.

all that has been said was that plan is top heavy so need contribution to cover 5 years.

you would first have to 'make' the contribution for 2001 and then rerun your top heavy test.

without knowing numbers I suppose it is possible one contribution might kick the plan out of being top heavy in one of the later years. plus you have to be careful running the numbers. thats about the time the rules changed (1 year instead of 5 years, who is key, etc)

[Bill Presson]

You could also consider the possibility that with the failures that you don't have a qualified plan and haven't since 2001. You'll want to consult counsel on this, but paying back the contributions for two people and filing amended 1040's for five years might be much less expensive.

[K-t-F]

Tom... I brought up that very point! The fact that making the contributions back in 2001 might have moved the plan from being TH to not being TH. The plan sponsor is paying me for my time and advice. The payroll company is performing the correction which is fine with me. He simply asked me what the fines might be if he was ultimately caught.

Thanks