Document different than original intent

[401_4_ever]

I am having a bit of a brain cramp on this. Can anyone point me to the correction method for when the plan document does not match the sponsor's original intent, and the sponsor has been operating the plan all along in violation of the plan doc? I know it involves a retro-amend & vcp submission but I am having trouble finding it in either of the rev procs (2003-44 & 2006-27). Thanks in advance.

[namealreadyinuse]

Ahhh, the legendary scrivener’s error. It does not exist if you ask the IRS and you certainly won't find it in EPCRS.

[jpod]

It is true that there are no special correction rules for scrivener's errors. However, you should review the general rules in Rev. Proc. 2006-27 addressing the correction of operational errors through VCP by means of a plan amendment. Those rules permit correction through a retroactive amendment to conform the terms of the plan to its actual operation, as long as the amendment does not result in a violation of 411(d)(6) and a couple of other Code sections cited in the Rev. Proc. It's usually very difficult to qualify for this, but if the facts are right it might work.

[J. Bringhurst]

If you don't want to go the retroactive plan amendment route, and want to try for scrivener's error, check your other benefit materials, such as the SPD, and see if you can find any evidence supporting "intention." You may be able to get the sponsor to certify (through board action, secretary's certificate, informal memorandum) as to the fact that this was truly just a drafting error.

[Guest SPOT]

I have a group of clients who use one document provider. Often times the document provider who is a local attorney will tell the clients that they don't have to follow the terms of the plan if the way they operate the plan is not discriminatory. For instance, what if the client wants to give NHCEs a higher profit sharing contribution than HCEs. The allocation method in the plan document is prorata on compensation. I can't understand why they don't just amend the document to allow for different allocation groups. Do other people have this same problem with document providers? What exposure would the client have under audit in this situation?

Thanks in advance.

[J. Bringhurst]

Exposure is that they have a failure to operate their plan in accordance with its terms...let's just say the plan provides that compensation for plan purposes includes bonuses, commissions and overtime but the employer is operating it based on base wages (not a qualification issue, but a plan design issue). If discovered on audit, best case is that the employer may have to kick in the extra money (money that would have been deducted from participant paychecks) plus earnings...plus some punitive amount because there are other failures...worse case...plan disqualification...I wouldn't mess with it and I'd fire that attorney. Tell him/her to read Rev. Proc. 2006-27.

[PLAN MAN]

I agree, Rev. Proc. 2006-27 is there so plans can fix many types of errors, including not operating the plan in compliance with the plan terms. An attorney should not be encouraging them to ignore the plan document. I would think the IRS would levy some kind of fine for this type of failure, even if it benefits the nonhighly compensated employees.

Note on J. Bringhurst's comment, if the employer does not take into account bonuses, commissions and overtime when operating the plan, that definiiton of compensation must be tested to be sure it is not discriminatory. If more than a de minimis amount of the percentage of highly compensated employees' compensation versus total compensation is greater than that for nonhighly compensated employees (compensation ratio test) the compensation used is considered discriminatory. And that could be a qualification issue.

[Guest Pensions in Paradise]

We had the same situation. A local attorney was telling clients they could operate the plan differently from the plan document. We spoke with the attorney but it did no good. So we told the mutual clients they had two choices - find a new TPA or find a new attorney.

[401_4_ever]

I couldn't agree more. I am an attorney and am ashamed of the actions of my otherwise (sometimes) noble class...

[Guest merlin]

We recently stumbled onto a similar situation on a takeover plan. Long story short, the plan document has defined comp as total since the T/D/R restatement in 1984, but plan has been operated on basic rate (the original ERISA plan definition) until now.

We've been in contact with the IRS Northeast Region EPCRS people (Janet Mak and Scott Feldman in particular) and they have been extremely helpful, answering a lot of generic "what if" questions. You can submit a reformation amendment under VCP, but their decision will depend a lot on what the employees were told, what their expectations were, etc. You can submit anonymously, but you have no audit protection in the meantime. We're leaning toward recommending that the client go in with full disclosure up front. We're also planning to reconstruct benefits all the way back and submit that information at the same time. That way we've got the audit protection, and, in the event that the amendment is rejected, we'll have the alternative correction in place at the same time.