Is this an egregious error?

[Gary Lesser]

A business owner and one other employee paticipated in nonintegrated SEP. The owner consistantly received a 10% contribution for the last 8 years and the employee received 7%. In addition, the owner's 2 children were eligible for at least some of the years, and it is not know whether they received contributions, and if so, at what rate.

What do you think: is the failure to allocate in accordance with the plan's provisions an egregious failure under Revenue Procedure 2006-27? Assume children received (a) $0, (b) 7%, and © 10% in years that they were eligible.

From Rev. Proc 2006-27

Egregious failures. SCP is not available to correct Operational Failures that are egregious. For example, any of the following would be considered egregious: (a) a plan has consistently and improperly covered only highly compensated employees; (b) a plan provides more favorable benefits for an owner of the employer based on a purported collective bargaining agreement where there has in fact been no good faith bargaining between bona fide employee representatives and the employer (see Notice 2003-24, 2003-1 C.B. 853, with respect to welfare benefit funds); or © a contribution to a defined contribution plan for a highly compensated employee is several times greater than the dollar limit set forth in § 415. VCP is available to correct egregious failures; however, these failures are subject to the fees described in section 12.06. Audit CAP is available to correct egregious failures.

[J Simmons]

I think it's egregious. It's lasted 8 years. The operational failure has favored a highly compensated employee.

[Belgarath]

It's hard to say. While I'm inclined to agree that it is egregious, I think I'd try filing under a regular VCP. If the IRS determines that it is egregious, they will come back and impose the higher fee.I'd say that there's at least some chance that the IRS will let it go through under the regular VCP fee schedule.

[Gary Lesser]

The facts have changed.

The employer received 3/4% in even years and 15% in odd years. The one employee always received 8%.

Arguably, this is no longer egregios. What are your thoughts (is self-correction possible)?

Belgarath, I like your idea of submitting as non-egregios and have the IRS say it is.

[Belgarath]

I don't think it is eligible for self-correction, regardless of whether or not it is egregious. I would classify this as "significant" which gives you the "2-year" limitation. I think you have VCP all the way - just a question of the fees/sanction as to whether egregious or not.

[Gary Lesser]

Excellent point.