Ineligible Participant in DB Plan

[BTG]

Our client has discovered a situation where an ineligible individual has been participating in a DB plan with mandatory ee contributions... for almost 20 years. I am aware of the EPCRS correction procedure in Sec. 2.07 of Appx. B for early inclusion of an otherwise eligible employee, but this individual is not in an eligible class of employees at all.

Is anyone aware of an EPCRS correction procedure for the inclusion of a completely ineligible employee (as distinguished from an employee that was simply let in prematurely)?? I assumed this would be a common problem but I haven't been able to find anything on it in EPCRS or elsewhere.

[Guest mjb]

Our client has discovered a situation where an ineligible individual has been participating in a DB plan with mandatory ee contributions... for almost 20 years. I am aware of the EPCRS correction procedure in Sec. 2.07 of Appx. B for early inclusion of an otherwise eligible employee, but this individual is not in an eligible class of employees at all.

Is anyone aware of an EPCRS correction procedure for the inclusion of a completely ineligible employee (as distinguished from an employee that was simply let in prematurely)?? I assumed this would be a common problem but I haven't been able to find anything on it in EPCRS or elsewhere.

Why not amend the plan to make him an eligible to participant? And how would the IRS ever discover that he is not eligible?

[Guest Sieve]

Remember -- your corrections generally are not limited to those mentioned/described in EPCRS. You can correct any failure, operational or demographic, if you can come up with a method which is consistent with EPCRS principles (except where specific failures are required to be corrected in a specific manner). Notice the use of the word "should" rather than "must" in Section 6, and the use of "acceptable" rather than "required" in the very first paragraphs of Appendices A & B.

I would think that an appropriate method to correct this one would be to give back the employee mandatory contributions with interest (and hope the employee doesn't sue based on an expectation of receiving a pension or loss of the opportunity to voluntarily participate in a 401(k) plan based on the expectation of a pension).

By the way, amending the plan to make this participant eligible would have to go back 20 years, and might also have to include others similarly situatied unless you can specify a limited job category.

[BTG]

Thanks for your thoughts. In our case an amendent isn't really a practicable solution for a variety of reasons unique to the sponsor. Sieve, I like your solution of refunding the employee contributions with interest. We were thinking along these lines, and Sal Tripodi's ERISA Outline Book, at page 15.544 (of the 2005 Edition - we need to update), recommends a similar solution (though mainly in the context of a 401(k) plan).

[jpod]

Is the employer going to come up with the money out of its own pocket or does it hope to get the money from the plan? Is there a Code Section 401(a)(2) "exclusive benefit" or ERISA "exclusive purpose" problem with pulling the employee contributions out of the plan?

[BTG]

Is the employer going to come up with the money out of its own pocket or does it hope to get the money from the plan? Is there a Code Section 401(a)(2) "exclusive benefit" or ERISA "exclusive purpose" problem with pulling the employee contributions out of the plan?

The Tripodi Book I mentioned in a prior post discusses both of these possibilities (i.e., paying out of the employer's pocket vs. paying out of the plan). Apparently, the IRS has informally expressed a preference for out-of-pocket payments. I agree that this is the cleaner method. I can also see how there is arguably an exclusive benefit/purpose issue with refunding contributions directly from the plan. Do you agree, though, that this issue is avoided by making out-of-pocket payments and leaving the contributions in the plan to reduce the next employer contribution?

[Guest Sieve]

jpod /BTG -- Since the $$ are not being returned to the employer, and are not employer funds in the first place, I would argue that there is no violation of the "exclusive benefit" rule if refunds are made to the employee because this individual is a participant in the plan to the extent of his/her employee contributions, plus interest. So, I'd have no problem returning the $$ from the plan directly to the "non-participant"--or, for that matter, having the employer return the $$ from its general assets and then offset the next employer contribution by the amount of its inadvertent "pre-funding". As suggested, the latter approach may be a better alternative (although I think it produces an "indirect" return of the funds from the plan).