Demographic Failure

[Blinky the 3-eyed Fish]

DB plan fails 401(a)(26), which is discovered upon submission of the plan to the IRS. The plan was adopted in 2000 and submitted to the IRS before 1/31/04 to be timely under the GUST RAP. (Yes, they are just getting to it now.)

Let's say it fails 401(a)(26) because it's an offset plan and doesn't meet those requirements operationally. My understanding is that's a demographic failure and upon IRS discovery must be handled through Audit CAP. The IRS agent doesn't have authority to correct on their end. (Of course I am also assuming we are past the -11(g) period.) Agree?

However, let's say it fails 401(a)(26) because the document benefit is below the "magical" 0.5% benefit for enough people. I have to think this is a plan document failure that can be corrected without going through Audit CAP. I say document failure because under the terms of the plan with the participants eligible, there is no way to satisfy (a)(26) if you consider under 0.5% not benefiting. Agree?

Now what if it's a combination of the two. However, to correct the plan document failure the plan increases benefits to 0.5% and removes the offset altogether solving both problems. (a)(26) is saved! In other words, is the correction of the plan document failure limited to increasing that benefit and cannot change provisions that would solve other problems or is this allowable?

[Mike Preston]

If the plan is submitted for a letter of determination with respect to a period during which the remedial amendment period is still in effect (as it is for a GUST restatement submitted before 1/31/04, or later if authorized and allowable by virtue of an underlying advisory letter being issued subsequent to 1/31/03), and the plan has a problem that is discovered during the determination letter review that can be corrected by modifying the document language, then the plan can be corrected during the submission process. This is the very nature of the 401(b) period.

If there are IRS auditors attempting to modify this by claiming a submission tolls only a document failure and not a coverage and/or discrimination issue the issue should be kicked upstairs to a manager.

Send a letter to ASPPA with the details, as this is the sort of thing that Brian Graff eats up: making sure that the IRS treats the practitioner community in a fair and consistent manner.

Unless I'm completely misunderstanding what is going on, of course.

[Blinky the 3-eyed Fish]

Mike, you are correct that an aggressive agent is planning on doing just that. I say planning because the issue is going for technical advice, so we will see what transpires. The issue could be corrected by an amendment to the plan giving people more benefits, but the agent doesn't see that as a simple solution. Though I am pretty sure that will be the eventual outcome should the technical advice come back adverse for the client.

I am happy to see the technical advice be issued. It beats playing by ambiguous rules.

This agent is a piece of work by the way. He initially was challenging the permanency of the plan that is 8 years old. He wondered how the cash balance account was determined in his initial response despite the fact IT ISN'T A CASH BALANCE PLAN!

I have included Brian before and will again if needed. Thanks.

[Mike Preston]

I strongly suggest that the request for tech advice be reviewed by Brian or somebody he feels comfortable reviewing it on behalf of ASPPA. I know when I was involved with a TA request a few months ago (not one of my clients, just a friend type of thing) ASPPA was more than willing to assist in the drafting of the request. This is a critical part of the equation and you are not well served by getting ASPPA involved only after the horse has left the barn.

[Blinky the 3-eyed Fish]

I am actually not too concerned with what transpires with the tech advice request. We are not disputing the facts that were written up by the IRS agent on that front. I will email it to Brian though to see if he has any concerns.

Really though my only concern is the available correction should this come back that correction is needed. If we are able to retroactively correct via an amendment, the cost is minimal to the client.