ADP Failure due to "new" HCE

[Guest ebailey]

We have an employee who works for two employers. It was recently determined that these employers are part of the same control group. Thus when the employee's income is aggregated, the employee is a HCE in the Plan. Adding this HCE into the Plan makes the plan fail the ADP tests for the last 3 + years (assumingly back to the date the employee started working for both employers). There are no other plan issues other than this. Does this require VCP? How far back do we have to distribute excesses, contribute QNEC etc. (or one-to-one fixes) and do we need to fix the excesses for ALL HCEs? OR can we call this an operational failure - fix the excesses for just the one individual HCE and call it a day? Any thoughts Also Pamela Purdue mentioned in an Benefits CLE that there was a "Woods" case that discussed the requirement that the plan must be "fixed" going back to the beginning of the error not just back to the 3 year statute of limitations- any info on that case?

Thanks

[J Simmons]

The failure is an operational one. To correct using SCP, the plan must have had established practices and procedures designed to keep the plan compliant. If not, then VCP is necessary to correct. If the plan does have those established practices and procedures, this failure was likely significant given how many years it spanned. A signficant operational failure may only be corrected by SCP if corrected within 2 years after the year of the failure. That appears to be inapplicable and pointing also to VCP being necessary.

You do have to correct both the years that are yet open and those closed by the statute of limitations. Section 6.01 of Rev Proc 2008-50.

[QDROphile]

Time is a factor in deciding if a failure is significant, but a period greater than two years does not make the failure significant by itself.

[Guest Sieve]

Self correction of an ADP failure, even though it might be significant (and it probably is, as per Section 8 of EPCRS--Rev. Proc. 2008-50), can occur for 2 years following the period of statutory correction. So, a 2006 ADP failure can be self-corrected by the end of 2009.

You'd have to re-run the ADP test, and correct accordinlgy. Now, if you want to go in under VCP for a different correction method--e.g., only making the correction as to this individual--then you certainly can utilize VCP to propose a different correction method. Probably not worth the time & expense, however--unless your ADP corrections go further back than 2006, in which case you'd have to use VCP anyway. But, to me, your suggested correction method seems inappropriate--sort of a last in, first out approach.

[Kevin C]

You are fortunate there are no other issues. The way my luck goes, I would have had coverage problems, too.

If there are other 401(k) plans among the controlled group, make sure you take into account the special rules for HCEs eligible under more than one CODA of the employer. 1.401(k)-2(a)(3)(ii) and 1.401(m)-2(a)(3)(ii).