Plan or No Plan?

[Guest CygnusX1]

Situation:

An employer establishes a new 401(k) plan and signs an adoption agreement with an effective plan date of 01/01/2008. The plan is never communicated to the employees, no enrollment forms are ever completed and no contributions are ever deposited to the plan.

Questions:

1. Does an employee obtain a "right to defer" simply by the signing of an adoption agreement? If so, is the employer now liable for "missed deferrals"?

2. Or, can the employer simply move the effective date of the plan forward, since no communications were made to the employees and no contributions made?

[MSN]

I believe the proper answer is that the Employer should have made the plan available to the employees and would be responsible for the missed contributions. I don't believe the IRS would support the "oops, I really meant to offer this starting on_____ so I'll amend the effective date" approach if you asked the question directly.

Whether that is the most practical way to approach the situation is another issue.

Just my 2 cents...

[Guest susanca]

I'd like to open this back up and get more input regarding correcting this situation. Per Rev. Proc. 2008-50, the correction for a missed deferral opportunity is for the Employer to give a QNEC equal to 50% of the missed deferrals which is based on the ADP test. However, if no test was ever done because no one deferred, because they did not "realize" that they had a 401(k) feature activated, how is the base determination made?

[BG5150]

To be honest, who is going to know other than the boss and the guy who wrote the document? Did it get sent in for an approval letter?

[Guest Sieve]

I personally don't believe that elective deferrals begin until the employer chooses to cause them to begin. So, the plan can be effective as of 1/1/2010, but the employer, for whatever reason, may choose to delay implementation until April 1 and decide not to give notice of the elective deferrals until 3/1.

[BG5150]

And, was a trust created? I thought there had to be a trust before a plan could be in effect.

[Belgarath]

Sieve - I'm curious about this - what do you think the IRS or DOL would say if they somehow got wind of the plan and audited? For example, plan document signed in 2009 establishing the plan as of 1/1/2010, with a 3% dollar for dollar match. But the Employer, for reasons unknown, delays implementation until November of 2010. Do you think the IRS, when they audit this in 2012 would say that this was acceptable and no "fix" was required?

I just wondered if you had any actual situations like this that you had encountered. I haven't (seen one of these audited, that is) so I have only an opinion, unsullied by actual experience. And my opinion is that the IRS wouldn't just let this go. But I could be all wet on that. At any rate, I certainly wouldn't advise a client it was ok, I'd send him to one of you lawyers so you would be the one on the hook.

[Guest JHeller]

I have a similar question. If a plan was established in 2008 and contributions were never made:

1.would the plan need to file 5500s with $0 balances?

2.would the plan need to go through the normal plan termination process?

I can't seem to get a straight answer on this.

[Guest Sieve]

Bel --

I've had few plans which delayed implementation of elective deferrals, and even fewer wanting to cease current deferrals company-wide. In no case, I believe, was there a match involved--just emploee deferrals. None of those was ever audited, so I am not speaking from experience--just gut feeling.

In my mind, it would depend on facts & circumstances--such as no match, whether it was at initial implementation or cessation of deferrals at a later time, lack of appropriate administrative support from service providers, etc., etc. I did not mean to suggest that it always is an acceptable practice. And, of course, it must meet other requirements when eventually implemented. Your example of a hard match in the Plan document would mitigate towards the employer having to make up deferrals & match (although on what basis, since it's a new plan--assume 3% deferrals?). But, if there were only employee deferrals and it's a new plan, & it's never been presented to employees & no SPD has been distributed, I'd have little problem with it.

[Guest susanca]

In response to some of the replies so far (and thank you, everyone, for your input)...

Yes, the plan was submitted for a determination letter but we have not received the letter yet. Even if it wasn't submitted though, I certainly don't feel comfortable with the idea of "ignoring" that original, executed plan document.

I'm not sure what the actual ruling is on whether the trust is or is not set up yet just by the fact of there being no money deposited to the account yet. There are plenty of profit sharing-only plans that are set up well in advance of the first contribution actually being made. Would those plans be negated up until the first dollar hits the trust? I don't think so. There is an executed plan document and trust agreement in place - I think that would/should be enough to establish the plan.

All employer contributions are discretionary for this particular plan.

So, I'm still wondering what the best correction would be. Would it be feasible for the employer to go back to the eligible employees and let them know that they could have deferred and see if they would have wanted to and how much and then give a QNEC equal to 50% of that?

[BG5150]

So, I'm still wondering what the best correction would be. Would it be feasible for the employer to go back to the eligible employees and let them know that they could have deferred and see if they would have wanted to and how much and then give a QNEC equal to 50% of that?

If this is the way to go, you had asked what the deferral rate would be since there was no ADP test to determine that.

What does the plan doc say about ADP/ACP testing in the first year. Many times, it will allow you to do a default 3% for the NHCE's. So, you'd have your percentage there.

That said, I think you would have other concerns. What about the notification requirements under ERISA Title I? More specifically, the SPD? Did anyone get these?

Someone asked about the 5500. If the plan was in existence, even unfunded, then I believe that a form 5500 should have been submitted because there were participants in the plan. ERISA also states that an SAR must be given to participants.

ANOTHER concern: the plan that was effective 1/1/08--was that on an EGTRRA document? Or GUST? Has the plan been restated and have all the latest mandatory amendments been completed and signed? (and any SMM's that would result?)

[Guest susanca]

The ADP Testing method was set up as Current Year so can't use the deemed 3% NHCE ADP.

Not sure, yet, if SPDs were provided to Eligible Employees. For my problem plan, since it is a profit sharing plan with 401(k), but the employer was not aware of the 401(k) part (but definitely should have been aware of the profit sharing part), I hope they provided the SPDs, regardless.