Cafeteria Plan

[Guest Buzzman]

If a corporation has offered a cafeteria plan to its employees for years under the mistaken assumption that it was a participating company under the plan document of an affiliate (but in fact the plan document did not provide for participation by such corporation), so in fact the plan has not had a plan document at any time (dating back probably to the 1970's), how do you fix it retroactively?

[rocknrolls2]

Unlike qualified retirement plans, there is not currently in place any type of correction program for cafeteria plans or any other welfare benefit plan for which an income tax exclusion is otherwise available. However, if the experience of IRS Notice 2007-78 is any example (in which the IRS said it intends to establish a correction program for 409A violations) and the informal buzz of feedback on the cafeteria plan proposed regulations are any indication, it is expected that there will be a significant hue and cry from the practitioner community that the IRS will establish a correction program. In the meantime, I would not hold my breath until such correction program is established (even if it is, it will likely be very limited and might not cover this type of situation). I would establish a plan document for the plan based on its operation currently and have it effective currently. I would not say anything about there being no prior document and I would in no event create a series of amendments that are retroactively effective that state the plan's operational practice from the inception (assuming there is even a single individual with an ability to recall the initial plan operation). If the IRS were to examine your plan, you would have to come forward at that time and state that you thought you were covered by an affiliate plan but that was not in fact the case. The intent here is not to manufacture evidence that is not in fact there but rather to show you realized the goof and intend to set things straight going forward. If the IRS sees this, they will probably impose some type of penalty or closing agreement fee for the past violation but it will be substantially less than it otherwise might be if you were to wait until the IRS cafeteria plan correction program covers your type of violation.

[Guest Buzzman]

Unlike qualified retirement plans, there is not currently in place any type of correction program for cafeteria plans or any other welfare benefit plan for which an income tax exclusion is otherwise available. However, if the experience of IRS Notice 2007-78 is any example (in which the IRS said it intends to establish a correction program for 409A violations) and the informal buzz of feedback on the cafeteria plan proposed regulations are any indication, it is expected that there will be a significant hue and cry from the practitioner community that the IRS will establish a correction program. In the meantime, I would not hold my breath until such correction program is established (even if it is, it will likely be very limited and might not cover this type of situation). I would establish a plan document for the plan based on its operation currently and have it effective currently. I would not say anything about there being no prior document and I would in no event create a series of amendments that are retroactively effective that state the plan's operational practice from the inception (assuming there is even a single individual with an ability to recall the initial plan operation). If the IRS were to examine your plan, you would have to come forward at that time and state that you thought you were covered by an affiliate plan but that was not in fact the case. The intent here is not to manufacture evidence that is not in fact there but rather to show you realized the goof and intend to set things straight going forward. If the IRS sees this, they will probably impose some type of penalty or closing agreement fee for the past violation but it will be substantially less than it otherwise might be if you were to wait until the IRS cafeteria plan correction program covers your type of violation.

Thanks!!

[Jacmo]

You can correct from this point forward by doing a joinder agreement pulling the sub/affiliate under the Sponsoring Employer's plan. There is also an informal method of "prior correction" called a Plan of Correction. It simply identifies the problem, the whys and wherefores, dates, and states the steps taken for correction and briefly outlines steps put in place to prevent future similar occurrences. The Plan of Correction is then placed with the Plan Document to be available in the event of a future audit.