Plan operated contrary to documents for years

[J Simmons]

I recently came across a situation where the plan documents have for the plan's nearly 20 years of existence provided for profit sharing contributions, but not included a 401k feature, and called for trustee direction of investment of pooled accounts, but allowed for participant direction of investment. (The investment adviser when asked over the years would simply assure the ER that it could do these things because it is the ER's plan, so the ER could do what it wants--never mentioning the need to put those design choices into the plan documents.) Also, ADP testing has only been sporadically performed for the plan.

I have been hired to prepare an EGTRRA restatement, and will add provisions to reflect the practice going forward. Of course, my concern at this point is the past.

The different rates of returns that different employees have had since operationally being permitted to direct their investments presents a problem. Since the plan document has not allowed that, an employee whose rate of return has been lower than what the plan average has been could make a claim for more benefits than are in his account. And of course, any employee could make a claim against the trustees for investment underperformance if that is the case (I do not know).

Has anyone approached the VCP or CAP units of the IRS with a similar situation and know what might be their inclination for remedying such a situation?

Any experience sharing is greatly appreciated.

[J Simmons]

Just bumping this up to the attention of those that might have missed it the first time.

[Bird]

I'm not any kind of an expert on VCP or CAP but I think the solution has to be to retroactively allow what has happened already. You can't really even think about trying to adjust returns as if it had been trustee-directed.

[Belgarath]

John, it's funny you should mention this, because for the first time in my 25 years in this business, I was contacted by an employer and encountered the same thing just a couple of weeks ago! It sounds like the same plan. We weren't interested in messing with a situation like this, and our advice was to contact an ERISA attorney. One has to wonder about the former so-called "advisor" ...

The closest situation that I've encountered was a situation where a client operated a pension plan (a money purchase plan) for years without a document. When he decided to amend and restate to a PS plan, he adopted an appropriate EGGTRA PS document. Almost immediately thereafter, he was selected for a random audit. He must have caught the auditor on a good day, because the auditor apparently allowed him to retroactively adopt a money purchase document with a properly completed EGTRRA document, and did not impose ANY sanctions or penalties! (Not a plan we administer, so I only know sketchy details)

I think all I can suggest is a John Doe submission under Revenue Procedure 2008-50.

[Blackbirch]

In every scenario that I've encountered where the operation and document went different directions, the service has been unwilling to allow a retroactive amendment to conform the plan to the operation. Rather, they're looking for the operation to be corrected to match the plan. Granted, I've never encountered a disparity as grand as yours.

That said, I'm not sure what the fix would be here. Certainly the service could throw its hands up and go for disqualification, but that's never a desirable outcome, even from the service's perspective. Rather, you're more likely to get away with a limited correction. The agents I've dealt with on the EPCRS side of things have been empathetic to practical limitations of available records. They would likely accept a correction that adjusted the investment returns, but only to the extent that necessary records were readily available. Depending on how far back you go, you may find you'll have troubles locating some affected participants.

One other angle to consider is that EPCRS, when dealing with adjustments to participant accounts, permits you to disregard negative earnings. If you could put together a demonstration that the rate of return for administrator-directed investments (not sure what you'd use for a benchmark) were inferior to the actual results experienced by participants, you could find yourself in a "no harm, no foul" scenario. In that case, you'd still need to make the VCP filing, but there wouldn't be an actual correction, which is the part I would expect the client to be especially fearful of.

Any clue how the plan was treated for the purpose of 5500s/audits? Was the plan reported as participant-directed? Did the Auditors ever look at the plan document? Do you know if there's a current SPD (and what it says)? Did the plan receive a GUST letter?

One thing I can say for certain is that if you're submitting the plan for a determination letter, this isn't an issue you're going to be able to resolve with them, alone. If there's anything short of a full and complete correction, they're going to want an EPCRS sign-off on the methodology.

Good luck!

[Jim Chad]

I also must have had an auditor on a good day. I had a plan audited two years back a month after I started changing it from an MPP to a 401(k). No MPP doc was ever found. The IRS auditor let them current date a GUST MPP doc and I finished restating for EGTRRA to a 401(k).