Distributions processed - didn't follow plan document

[TPAnnie]

Hi! Our firm administers a PS plan whose document states distributions will occur upon close of plan year coincident with or next following date of term, however over each of the past 3 years, we've inadvertently distributed a participant immediately upon termination. (There were roughly 10 distributions per year that occurred correctly.) Each mistake happened unintentionally, probably because of a "squeaky wheel".

Is this a disqualifying event? We've been tagged for audit and are trying to determine if there is any type of self-correction method - or if it's too late.

TIA!

Annie :-)

[Guest Sieve]

Well, you're certainly not following plan terms, so you ought to correct.

But, here's your dilemma:

• Once informed that the plan will be audited, only self-correction (and not VCP) is available for a newly-discovered error. (EPCRS Sections 4.02 & 5.07(2).)
  
• It seems to me that the only way you can correct this operational failure is to amend the plan to permit immediate distributions for all participants upon termination of employment. But, you cannot correct that particular operational failure under VCP. (EPCRS, Appendix B, Section 2.07.)
  

So, all you can do, it seems to me, is either hide it or fess up to the auditor and see what you can work out at the audit level. If you choose the latter approach, groveling helps.

[mming]

I've seen this situation handled a little differently. The provision in the doc regarding the timing of distributions could be considered the latest that a payout can occur. If someone is paid sooner that that it's considered a precedent and not an operational or doc failure since the plan is being less restrictive. The precedent establishes, however, that all future distributions must occur at least as quickly as the first early distribution occurred, but it sounds like most successive distributions didn't in this case and that may put you back where you started regarding the audit. Of course, this methodology assumes that only ancillary employees were paid early and not HCEs or keys to create discim issues. I'm also guessing that the audit is general in nature at this point and has not targeted specific distribution issues.