Plan Loan Correction

[Guest BWORC]

My client has a plan that permits loans, but only up to half of the amount in the participant's voluntary deferral account. Unhappily, it made two loans (both to HCEs, coincidentally) in excess of the plan limit, although well within the limits of 72(p)(2)(A)(ii). We were found out upon an audit. I want to correct under EPCRS with a retroactive plan amendment, arguing that this is an error less egregious than making loans that are forbidden by the plan document. Our auditor says that the language in RP 2006-27 says what it means, and a retroactive amendment is possible only if the plan does not permit loans.

Has anyone had this problem and found an acceptable fix once you are under examination?

[Guest Pensions in Paradise]

Since the plan is under audit you are now subject to the terms of Audit CAP. Fortunately, Audit CAP does allow for retroactive amendments. Section 4.05 of RP 2006-27 states:

Correction by plan amendment. (1) Availability of correction by plan amendment in VCP and Audit CAP. A Plan Sponsor may use VCP and Audit CAP for a Qualified Plan to correct Plan Document, Demographic, and Operational Failures by a plan amendment, including correcting an Operational Failure by plan amendment to conform the terms of the plan to the plan’s prior operations, provided that the amendment complies with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6).

If the auditor does not agree with your proposed correction method then you may ask to speak to his/her supervisor. Although this won't win you any browny points with the auditor!!

[Guest BWORC]

Thanks,

Rev. Proc. 2006-27 allows correction by retroactive plan amendment under SCP in the circumstances I outlined in my original post. The auditor won't buy my interpretation of the SCP fix and we are working to get through him to his supervisor.

When I said to him that this was clearly fixable under Audit CAP, he intimated that we would be taking a big risk in negotiating the sanction amount. Question, if we begin the Audit CAP process and the sanction they require is punishing, can we bail?

In that case, we'd give the employees a 1099 and do our best to deal with the negative tax consequences.

[401_4_ever]

Question, if we begin the Audit CAP process and the sanction they require is punishing, can we bail?

While the audit cap process is a "negotiation" the consequence of not reaching an agreement is usaully plan disqualification.