Fixing enrollment of ineligible employees

[Guest RopedIn]

My company has a Safe Harbor plan (flat 3%) with a one year of service eligibility requirement. We hired employees last year (our plan year is the calendar year) and enrolled them immediately (at their choice) because our controller forgot about the one year eligibility. Then we laid them off late in the year in what qualifies as a partial plan termination. Have we risked disqualification of our plan? How do we fix this now? And are we supposed to make safe harbor contributions for them (we do a one-time contribution each year that hasn't been made yet but has to be made by April 15)?

[Kevin C]

Technically, you have risked the qualified status of the plan. But, don't worry, you will have ample opportunity to fix it.

What kind of plan document do you have? Prototype, Volume Submitter, Individually designed?

Is 2008 the only year this happened?

How many people were given the opportunity to defer early?

How many total participants in the plan in 2008? How many active participants?

The IRS correction programs are spelled out in Rev. Proc. 2008-50. If you are not used to reading things like this, it may be difficult to read. IRS guidance can give you a headache even if you are used to reading it. Hopefully, you will be under the self correction program, SCP.

http://www.irs.gov/irb/2008-35_IRB/ar10.html

[Guest RopedIn]

Thanks, Kevin.

Prototype plan document. 2008 is the only year this happened because it is the first year with the one year eligibility restriction. 3 people deferred early. 46 total participants, of which 11 were active at the end of the year.

Thanks for the link. Any other advice would be welcome.

[Guest RopedIn]

It looks from the link as if the only remedy is to retroactively amend the plan to remove the one year of service requirement. So that would mean we should make the safe harbor contribution for those employees. Does that seem right?

[Kevin C]

If you want to self correct, you will have to follow the correction method in section 2.07 of Appendix B. With a prototype, you are limited in the choices for an amendment, so you probably would have to remove the year of service requirement for the deferral source to make the amendment work. I'm not clear whether it would be a significant or insignificant operational error. But, since it was only for 2008, that shouldn't make much difference.

Have they adopted their EGTRRA restatement yet? If not, this might be a good time to do so. Section 6.05, first paragraph says that a determination letter is not required if the correction by amendment is done by adopting a pre-approved prototype or volume submitter document where the employer has reliance on the opinion letter.

You said 3 deferred early. Were there any others that were offered the chance early, but declined? If you open up deferral eligibility retroactively, there would also need to be a correction for anyone who would have been eligible under the new rules, but was not offered the chance to defer.

Do they have to get the safe harbor? Well, maybe. What does the current document say about who gets the SH contribution? You are not required to give the SH contribution to otherwise excludibles. You are not allowed to amend or change the safe harbor rules during the year. However, IF your corrective amendment would be considered an -11(g) amendment, it would be deemed to be effective and adopted as of the first day of the plan year. That should let you change the SH provisions so that otherwise excludibles don't get the SH. Hopefully, someone more familiar with -11(g) amendments will express an opinion about whether the corrective amendment would be considered an -11(g) amendment.

[Guest RopedIn]

Thanks again, Kevin.

No one declined and everyone was offered the chance to defer. So in that sense the retroactive amendment should go smoothly. Unfortunately, we did the EGTRRA restatement already. The plan document says every eligible employee gets a SH contribution, so it seems like after the amendment, since they would now be eligible, they would get one.

Sorry for the novice questions, but what's a -11(g) amendment?

[Kevin C]

Sorry, I was referring to a corrective amendment described in 1.401(a)(4)-11(g). Most of what I know about them is from the posts I've read here. I'm thinking it would be an -11(g) amendment, but I'm no expert on -11(g) amendments. If it does fall under -11(g), you would be able to change the SH provision to not give the SH to otherwise excludibles without running into a problem with the plan year rule of 1.401(k)-3(e). You can't amend to take the SH away from someone who would have received it under the current terms of the plan. But, these 3 were not eligible to receive it because they are not eligible to defer under the current terms of the plan.

The suggestion of using the EGTRRA restatement to amend was to avoid having to submit for a determination letter at some point as part of the self correction process. It's not clear to me if an amendment to a pre-approved plan would suffice, or if you would have to restate. You could always restate again if that would be less hassle than filing for a determination letter.