Added a Roth and forgot to tell anyone

[Guest erisamelissa]

We have a client that changed service providers at the end of 2006, and the new provider made the client amend and restate to the provider's document platform. The client also decided to add Roth 401(k) contributions. The problem is that it is now August and nobody bothered to inform participants that they now have the ability to designate pre-tax elective deferrals as Roth Contributions.

Anyone else have this problem?

[masteff]

...changed service providers at the end of 2006, and the new provider made the client amend and restate to the provider's document platform...

Broader picture is the amendment and restatement. Have they put out any SMM's or a new SPD since the change that encompassed any material modifications to the plan? If not, they should be working on them.

Hopefully the designated Roth feature was made effective as of Jan 1, 2007, which gives you until late July of next year (the IRS says 210 days after close of plan year in which the material modification was made) to make an SMM.

At this point, I'd leave out when it became effective in any employee communications (other than SMMs where you can work it in w/ any other changes) and just focus on "check out this new feature".

[Guest BobK]

The IRS in Revenue Procedure 2006-27 (EPCRS) did not provide a correction for not allowing a participant to commence Roth deferrals or catch-up. They requested comments on what the practioner community thought would be a fair correction. Don't know if they recevied responses to this.

I did see on the published IRS work plan for this year that an update to EPCRS is a "priority" item.

So we shall see if this is addressed.

I know this does not help your current situation but maybe an answer is on the way

[jpod]

My off the cuff reaction is: announce it NOW and stop the bleeding. Don't propose to those people who made pre-tax contributions through the year that they may convert contributions already made to post-tax. Whether you should then do or consider any remediation is another issue.

[QDROphile]

If the Roth feature was added in 2007, you might consider removing it effective as of the original effective date.

[Guest mjb]

Isnt this the equivalent to the question whether there is a sound if a tree falls in the forest and no one hears it. Best thing to announce the availability of the Roth ASAP and just go on. I dont think you can convert pre tax to Roth after deferral has been elected.

[QDROphile]

Not quite. Removal takes advantage of retroactive amendment capability. If one can amend on October 15 to add a plan feature effective the prior January 1, can you amend to remove a plan feature? Not if the plan has operated in the year to give effect to the feature.

[jpod]

I think it is an open question whether you can amend retroactively, even within the same plan year, to cure an operational violation of this nature, absent VCP. Of course, that's putting the rabbit in the hat, because if you can eliminate this type of feature retroactively, within the same plan year, then arguably there is no operational violation in the first place. Regardless of the theoretical lense one views this through, I think it's an open question as to whether this would work, absent vcp. However, if you can get someone from the IRS' EPCRS unit on the 'phone really fast, I would ask whether this situation is correctable via vcp. The question is urgent because if it is correctable via vcp (and only vcp), I would not announce the Roth, but I would file the vcp. Assuming no HCEs have used the Roth, which seems to be clear from the OP, the IRS just might go for it. If IRS does not think it is correctable via vcp, then I would revert to my original thought and announce the Roth asap.

[Blinky the 3-eyed Fish]

I have a related question regarding a takeover plan. It's a non-standardized prototype document and the 401(k) provisions are checked in the adoption agreement. The plan has been around for 20 years. An SPD too was handed out that spells out that it's a 401(k) plan. However, the employer has never made the 401(k) feature available to participants. It's a small employer and I suppose they just didn't want to add complexity to their responsibilities regarding the plan.

Any opinions on the situation?

[jpod]

Blinky:

1. If a small plan, the vcp compliance fee should be manageable. I would consider correcting via a retroactive amendment via vcp. I think the employer would have a good shot at success if (a) nobody, ever, made elective contributions, and (b) you can demonstrate that there never was any intention to adopt 401k provisions, let alone implement same.

2. Assuming (b) is true, I would contact the guilty TPA or other advisor and suggest that he or she put his or her insurance company on notice.