Erroneous inclusion of independent contractor in pension plan

[jlea]

Let's assume that a particular medical transcriptionist is properly classified as an independent contractor, but has been permitted to participate in an employer's money purchase pension plan, in violation of the plan's terms. This has gone on for a couple of years; she has partially vested in her account.

There is a violation of the exclusive benefit rule and, under PLR 9546018, seems that her account balance is forfeited and the money remains in the plan to be used however forfeitures are handled under the plan. What type of reporting does this require?

Anyone handled this type of situation?

Any other thoughts on alternatives? Additional issues?

[jlea]

Really - no one wants to weigh in? Aw, shucks, folks.

What I've come across out there in the way of professional discussion of these issues is: (a) the parade of horribles is, well, horrible: plan disqualification, loss of deductions, immediate taxation to employees, etc.; and (b) you should be able to correct under EPCRS but EPCRS does not address this failure.

So it sounds like you have to go in or you risk everything - but if you go in, how ugly will it be?

Anyone addressed this type of situation?

(just call me the teacher in Ferris Bueller's Day Off: "Anyone? Anyone? The Magna Carta.")

[Steelerfan]

The IRS will not disqualify the plan. I'll go out on a limb and say they would NOT penalize every other participant for an error like this. You may be able to use the "mistake of fact" rules to return the money to the employer, but probably safer to use it to reduce future contributions.

[rcline46]

IMHO, you correct by forfeiting and removing the person from the plan. Past 'improper' deductions will be offset by future reduction in deductions - a wash. and DOUCUMENT, DOCUMENT, DOCUMENT.

[jlea]

Thank you for your swift replies!

And, after I posted regarding my horrible parade of horribles, I spoke with an IRS agent that I've been talking to about a couple VCP submissions.

You correctly predicted his response, which was that it could be self-corrected. Hurray!

And, documenting is one of my favorite things in life.

The more interesting question now will be how the independent contractor/former erroneously included individual feels about the situation . . .

Again, many thanks for weighing in!