Accidental Inclusion

[ERISAatty]

Here's a new one to me.

A Plan Sponsor/Employer has regular, permanent employees, as well as non-regular employees hired on from time to time to perform only a specific job. The non-regular employees work a full-time schedule for their duration, and are informed on hire that they will receive no benefits. They are also paid more per hour than the regular employees who receive benefits.

I know that nothing under ERISA prevents an employer from excluding certain classes of employees (like, here, the non-regular employees) from benefit.

The catch here is that the plan sponsor didn't make the plan CLEAR that such non-regular employees would be inelgible for retirement plan.

The employer's goal is to fix this problem without having to include the non-regular employees as benefits-eligible.

I'm thinking that the plan sponsor could amend the plan to document their actual intent. No need to tell the non-regular employees.

The other option I see would be to go through EPCRS, actually include the employees, and make QNECs, as needed.

The employer wants to get a waiver from the non-regulars stating that they waive benefits. I think that's like waiving a red flag in front of a bull. They'll start asking question, and claims could follow.

Anyone with me that a quiet, retroactive amendment, together with documentation that the amendment reflects the employer's original intent, would be ok?

[JanetM]

ERISAatty I agree with you. If these non-regular employees are told they are only being hired until future date and don't get benefits then just fix the plan document. No benefits would include no retirement. Retirement is a benefit - they were told up front. Just exclude them by class and be done with it.

[Everett Moreland]

"Anyone with me that a quiet, retroactive amendment, together with documentation that the amendment reflects the employer's original intent, would be ok?"

My impression is that a retroactive clarifying amendment excluding a class of employees risks IRS rejection in the determination letter process unless done through EPCRS.

[John Feldt ERPA CPC QPA]

From first hand experience (gulp), I have seen the IRS reject a retroactive amendment when the deadline to allow such an amendment had already expired (although in several other cases, exactly identical, they accepted the amendment when reviewed).

The amendment that was rejected was to correct a typographical error, and the IRS went to sanctions under audit cap when they saw this. We tried to do what we thought was best by making a correction in a cost-efficient manner using ordinary reasoning. If we had not done that amendment, the IRS would have never figured out that something was wrong. Ordinary reasoning does not seem to apply uniformly at the IRS. Lesson learned.

You can certainly do what you think is right, but watch out: if a mere typo goes to sanctions, your non-typo amendment could too! Based on my experiences with the IRS, I would not take that risk with what you described. I would recommend EPCRS to the client and get a hold harmless agreement if they decide not to do that.

[ERISAatty]

Hmmmm, that gets my attention.

Thanks for sharing the tale of woe, J4FKBC.

[Guest mjb]

Here's a new one to me.

A Plan Sponsor/Employer has regular, permanent employees, as well as non-regular employees hired on from time to time to perform only a specific job. The non-regular employees work a full-time schedule for their duration, and are informed on hire that they will receive no benefits. They are also paid more per hour than the regular employees who receive benefits.

I know that nothing under ERISA prevents an employer from excluding certain classes of employees (like, here, the non-regular employees) from benefit.

The catch here is that the plan sponsor didn't make the plan CLEAR that such non-regular employees would be inelgible for retirement plan.

The employer's goal is to fix this problem without having to include the non-regular employees as benefits-eligible.

I'm thinking that the plan sponsor could amend the plan to document their actual intent. No need to tell the non-regular employees.

The other option I see would be to go through EPCRS, actually include the employees, and make QNECs, as needed.

The employer wants to get a waiver from the non-regulars stating that they waive benefits. I think that's like waiving a red flag in front of a bull. They'll start asking question, and claims could follow.

Anyone with me that a quiet, retroactive amendment, together with documentation that the amendment reflects the employer's original intent, would be ok?

How were the employees informed that they were not eligible to participate in the plan(s)? If their employment was of short duration, e.g. 2 yrs what vested benefits would accrue?

Why would you want a waiver if employees were informed of their exclusion from benefits upon hire? Under the doctrine of repudiation the s/l for filing a suit for benefits under 502(a) of ERISA commences when a fiduciary repudiates/informs an employee of his ineligibility for benefits. The length of the s/l is the closest s/l under state law for an analagous action, e.g. breach of contract, which can be between 3 to 6 yrs. If the employee does not commence a suit before the s/l expires there is no liability for benefits under ERISA.

I would make the proposed amendment effective on the date of adoption or Jan 1.

[John Feldt ERPA CPC QPA]

As a follow-up to my earlier post (tale of woe) within this thread, the IRS agreed to a $2,250 sanction under audit cap for the typographical error. As background, when the typo was noticed, we did an amendment right away to correct (via retroactive amendment). Technically, the typo was a computerized translation error that occurred three years before starting at this job, when the old fields from the TRA86 document were transferred into the new fields of the GUST document - one field was incorrect, but at a glance it looked right (as long as you did not read it very carefully).

It sure seemed ridiculous to submit such an amendment under VCP. Now in hindsight, we are quite convinced that no IRS agent would have ever noticed the issue if the correcting amendment was not there to point it out to them when the plan terminated and submitted a Form 5310. The enrolled actuary (and his staff) also had not noticed it over any of the previous 4 1/2 years.

Also, the agent indicated that if our cover letter to the Form 5310 had gone into a lot more detail regarding the corrective amendment, instead of just pointing out that the amendment retroactively amended the plan formula to match the formula before the GUST document was adopted, then they might have allowed us to submit under VCP instead of going to sanctions under audit cap. That would have been nice to know ahead of time too.

[Guest taxesquire]

As a follow-up to my earlier post (tale of woe) within this thread, the IRS agreed to a $2,250 sanction under audit cap for the typographical error.

If they used audit cap penalties, it sounds like you got caught on audit or through the determination letter process, not EPCRS. I'm handling a VCP application with numerous retroactive amendments to things like eligibility, def of comp, and more, and it's sailing through...

Under audit or if caught during determination letter submission, it's very different than under the VCP

[John Feldt ERPA CPC QPA]

Yes, VCP would have been $750 plus the cost to prepare. Because it was a typo, we debated internally if it was really necessary to go VCP. Would the IRS (in light of Joseph Grant's comments about fines being reasonable) really think a large fine for a typo is reasonable? Hmmm. We decided to just disclose the amendment in the D letter process instead. Thus, one tale of woe.

You are correct, under VCP, it would have been stamped "ok".

There is more to it than just our internal debate. As you see from a prior post in this thread, the error was a computer translation issue - so now use your imagination and take a guess regarding how many plans were affected. I'll just say it wasn't merely one, and I'll say that about 15 similar plans were sent for Form 5310 D-letters before I started here, and the IRS never saw the issue, so no problems there. Plus, since the problem was identified, about five or six were amended, making the issue visible when the 5310 D-letter application was processed, agents even asked for more detail on those, but only one so far has gone to audit cap. So, VCP for each would be $750 x 20 = $15,000. Or, so far only $2,250 under audit cap. I guess we're ahead so far on the ultimate cost.

[ERISAatty]

Thanks for the update. It's always interesting and informative to hear of other's experiences and perceptions. Glad the tale of woe is coming to an end.