Changing the definition of compensation

[katieinny]

A current plan document says the definition of compensation includes all comp. It's been that way for at least a couple of years. The employer says that was a mistake -- certain compensation was supposed to be excluded. In fact, they've been calculating contributions on what they thought it was, not what it says in the document. I'm worried that changing the definition now, even if we only go back to the beginning of the current plan year (1/1/08), would be a cut-back. Does the change need to be prospective? I also think they need to go back and make additional contributions for those couple of years. Your thoughts would be appreciated.

[JanetM]

First thought is if this is profit sharing plan with last day rule you don't have cutback because no one has earned a benefit yet. As to the correction of prior years, if you have been using the wrong definition of comp you have operational failure that should be corrected.

[Guest Kabert]

I think the IRS and practitioners generally would agree with Janet that this is a defect that needs to be corrected under EPCRS (i.e., operation differed from plan terms). Around the water-cooler though, some practitioners might argue that this was a scrivener's error, the typo in the plan should be fixed quietly, and everyone should stop losing sleep over the issue.

[Blinky the 3-eyed Fish]

I am wondering why a client is calculating their own contributions.

Practioners that would argue this is a scrivener's error worry me.

[JanetM]

I agree Blinky. Too often scrivners error excuse is lame attempt to cover the fact you don't know plan provisions and are too lazy actually read the document.

Why do you wonder why the client is calculating the contributions. We do the calculations for all our DC plans.

[Guest Sieve]

I agree with the scrivener's error comments--easy way out, an attempt not to have to face the music. In this instance, no one checked the document to make sure it said what it was supposed to. Scrivener's error doesn't wash. That being said, the scrivener's error approach does make sense in at least one circumstance (although I can't say that I've ever seen the IRS approve that approach): if the prior document says A, and you've always done A, and the restatement says B, but you continue to do A because it was always done that way and was never discussed or intended to be changed to B, then I think you have a good argument for scrivener's error. With all the mandatory plan restatements we now face, voluntary changes in TPAs and merging of TPAs, all resulting in unexpected multiple changes in plan documents, sponsors often are faced with an inaccurate restatement and, truly, a scrivener's error. Clearly, the conservative and safe thing to do is to go in under VCP--sometimes, though, there really is a scrivener's error.

[Peanut Butter Man]

I think the IRS would argue that it is not a scrivener's error when the plan is not operated according to the provisions in the plan document - it is a plan document failure which needs to be corrected through EPCRS.

For me, scrivener's errors are where the plan document provider's software malfunctions, or the word processing program malfunctions, and a word winds up missing or garbled, or there is a typo, so that the average person reading the sentence would see that something is obviously wrong. I saw one plan that said Code section 451 compensation. It was a scrivener's error and should have said Code section 415 compensation.