Does Time Ever Heal All Wounds?

[Guest PBJ]

A plan sponsor restated its 401(k) plan in 2001 using a standardized prototype document. It did not realize that the document made the employees of another company in the controlled group eligible to participate in the plan. Therefore, it failed to offer those employees enrollment.

The plan sponsor had 4 highly compensated employees and over 100 non-highly compensated employees in the plan. At the time, the entity that was excluded from participation had well over 1,000 employees working from time to time on a temporary basis (none of whom would have been a HCE). When the plan sponsor discovered the error, it contemplated standard correction by making a contribution (plus earnings) to the excluded employees. However, given the number of employees potentially involved, and the fact that the employees were employed only periodically, it felt that the contribution would have been beyond its means. In addition, due to the transient nature of the workforce, the plan sponsor would have a difficult time properly identifying and finding all of the individuals affected by the problem. It also claimed that the employees would have been very unlikely to contribute, even if offered matching contributions.

Instead, the employer froze the 401(k) plan. It then adopted two nonstandardized 401(k) plans. One plan was a mirror image of the now frozen plan, except that it excluded HCEs. The other plan was only for the entity that had all the temporary employees. A few years later this plan was terminated since very few temporary employees participated.

The original plan has been updated for law changes over the years. In addition, it is my understanding that money has never been distributed from the original plan. At this point, the plan sponsor would like to eliminate the original plan partly because it is concerned as to how the restatement and submission process will impact the original plan and the second plan. In addition, it would like to allow the participants in the original plan (a large number of whom still work for the plan sponsor) to roll their account balances into the second plan.

It is my understanding that the phrase "time heals all wounds" does not apply here. In other words, that just because time has passed the original plan is not magically fixed and can be treated as a normal plan. Am I wrong in thinking that the original plan is no better today than it was 4 or 5 years ago? How would you clean this up?

I apologize for the long post, but at least it makes for an interesting story. Thank you in advance for your insight.

[401_4_ever]

Agreed, time passing doesn't fix this problem.

I had a similar situation to the original part of the problem -- plan restated to a prototype and controlled group were included. When we caught it a couple years later, we did a VCP submission with a retro-amend excluding the control group. The VCP got approved...Maybe that could work here?