EPCRS correction for excluded employees

[Kimberly S]

I am looking at a possible takeover plan that calls for immediate entry for all employees who are at least 21 when they are hired. The plan was established in 2005 with no employees. In 2006 they hired several employees, but did not offer them the option to defer because they thought they had an "owner only" plan that did not allow employees.

The EPCRS correction calls for making a corrective contribution based on the average deferrals of the NHCE group for a non safe harbor plan. Since no NHCEs have ever been permitted to make deferrals, how would that percentage be calculated?

[Tom Poje]

well, I guess of course one could always use VCP and see what the IRS suggests. since there are no guidelines, possibly go with a 3% QNEC - 'as if the plan was new and using the 3% assumed rate for prior year testing'. this would be twice the actual required amount required since you only need to put in 50% of the missed opportunity. my understanding of things is that you can correct under SCP follwoing whatever guidelines you can, if they don't correspond to anything the IRS might not accept them under audit.

[Belgarath]

I think Tom's VCP suggestion is good. I'm dubious that SCP will be allowable here, since ALL of the NHC were excluded. Are there matching contributions? What % did the owner defer? If the owner deferred the max, it'll be interesting to see if the IRS lets you get away with 3% - they might, for example, require 50% of the owner deferral %. All you can do is give it your best shot. Or, as Tom says, try an SCP and hop there's no audit, but I don't advocate this approach.

One thing is for sure IMHO - You can present a few alternatives, but make sure the client gets the advice of tax/legal counsel, and have the client instruct YOU how to proceed.

[Kimberly S]

Thanks. At this point we don't know if there was a match, or the HCE deferral rate. The issue came up as the client was explaining why they didn't think they needed a black out notice and that there was no prior year testing or 5500 to give us. In this situation, we will require that the prior TPA do the correction and just ask for a copy before we accept the assets. But I wanted to have some idea what that correction should be before they sent us anything.