Failure to allow eligibles to enroll

[Guest rush2112]

Hi, I have a client who failed to allow a division of eligible participants to enroll in the plan. They want to use the overall plan rate of return for each year (2000-2008) to calculate earnings. This is something I have never seen. Typically it is actual earnings, or for administrative ease, the highest performing fund for the time period. Never overall plan earnings. Is this an acceptable method under VCP?

[J Simmons]

There is some wiggle room. This sentence is from § 3.01(1)(a) of Appendix B of Rev Proc 2008-50: "Other earnings adjustment methods, different from those illustrated in this section 3, may also be appropriate for adjusting corrective contributions or allocations to reflect earnings."

However, Rev Proc 2008-50, Appendix B, § 3.01(3)(b) provides that "If a plan permits employees to direct the investment of account balances into more than one investment fund, the earnings rate is based on the rate applicable to the employee's investment choices for the period of the failure." It would be a rare circumstance, I would think, that would make a plan-wide rate appropriate as well.

[K2retire]

It may be a mute point. Do any of the investment choices actually have positive earnings numbers for the period in question?

[J Simmons]

It may be a mute point. Do any of the investment choices actually have positive earnings numbers for the period in question?

Mute by choice? (if losses).

Rev Proc 2008-50, § 6.02(4)(a) "(a) Corrective allocations under a defined contribution plan should be based upon the terms of the plan and ... should be adjusted for earnings (including losses) and forfeitures that would have been allocated to the participant's account if the failure had not occurred. However, a corrective allocation is not required to be adjusted for losses."

[Guest Sieve]

John --

How about EPCRS Section 6.06(2): "The correction should be reasonable and appropriate for the failure. Depending on the nature of the failure, there may be more than one reasonable and appropriate correction for the failure. For Qualified Plans, any correction method permitted under Appendix A or Appendix B is deemed to be a reasonable and appropriate method of correcting the related Qualification Failure."

So, you can always propose a correction different from one suggested in Appendix A or B. In that case, however, it's not a slam dunk.

In the OP, when you are putting people into the plan who presumably did not have any investment elections in place because they were not participating at the time (or if it's a correction for long ago, when appropriate records might not available or reconstruction of individual earnings would be almost impossible to determine administratively), then average fund earnings certainly would be an appropriate correction to propose. No telling how successful it would be, but why not try?

[J Simmons]

If they have and can articulate as part of the VCP application an undue burden, or impossibility, due to difficulties with records about the earnings rates, I would certainly suggest the correction specified in that application be plan-wide rate if that is readily known. I would think that would be one of the 'rare situations' (post #2) because it would also be conceding in that application that perhaps the plan has not kept adequate records for the 2000-2008 period. Trying to back out of one problem perhaps bumping into another.

[Guest Sieve]

Aren't plan records re: account info required to be held for only 6 years? So, individual records could just be gone.

Are you suggesting that for these individuals in the OP, who had no investment elections in place because they were not yet in the plan, the best correction would be to assume the highest earnings rate of any single fund during each year?

[J Simmons]

Aren't plan records re: account info required to be held for only 6 years? So, individual records could just be gone.

Are you suggesting that for these individuals in the OP, who had no investment elections in place because they were not yet in the plan, the best correction would be to assume the highest earnings rate of any single fund during each year?

Not necessarily. If those EEs have, since the improper exclusion was discovered, been enrolled and now made their investment directives, we have some indication of which investment options might need to be used to measure the investment gain (loss) adjustment. While this would not be the EE's investment choice for the period of the failure, it is at least some indication.

Since the improper exclusion was the result of the ER's error, it does not seem all that inequitable if the investment gain (loss) adjustment is based on the highest performing of the investment options.

[Guest Sieve]

No, using the highest rate of return is not inequitable/unreasonable--especially here, where an entire division apparently has not been enrolled at all. That's certainly the IRS' preferred approach, I think--but, under the right circumstances, you probably could sell the "average" approach.

It's helpful for advisors to understand that the EPCRS safe harbors are not the only approaches that can be used to correct. You ought to be a bit creative when you begin your VCP analysis, as long as you understand the SH approaches and keep them in mind.