415 Failures

[justatester]

OK...so I have a plan that typically fails 415 due to a very large profit sharing contribution. In most cases, all of the employees pretax ($16,500) amount needs to be refunded to "correct" the failure. Is this still permited? What about EPCRS? How does that now come into play? I believe this is now considered an "operational" defect, but it does not seem to change the correction method. The plan does not intend to change their practices and will still have numerous 415 failures every year.

Any thoughts, guidance would be greatly appreciated.

[QDROphile]

Plans are now required to have language to prevent annual addition violations. Although violations can be corrected, repeated violations cannot be corrected under EPCRS. The solution for the situation you describe is to have appropriate plan terms, then each year test a pro forma contribution and adjust the allocations/contribution to fit the annual addition limits before delivery of the contribution to the trust.

I suspect the practice in prior years was a violation, too. The correction provisions under old law were more limited than most people believed.

[justatester]

Thanks for the feedback...So what does one do when the plan sponsor refuses to change their practice? As a recordkeeper what is our obligation? Ok..so for 2009 they make the correction by distributing the excess through pretax. In happens again in 2010...what do they do?

[Mike Preston]

At the least, you should make it clear to the Plan Sponsor that they are operating their plan in a manner which is subject to unfavorable scrutiny by the IRS, and that the Plan Sponsor and the plan risks serious economic consequences by continuing the practice. Involve the client's counsel, if at all possible. Your responsibility should be laid out in your engagement agreement. If it isn't there in some manner, then put it in a supplementary writing.

In the end, your responsibility will depend on whether the client is ever called on the practice and, if so, to what extent your client can or decides to make a case that you should have done something that you didn't do.

However, notwithstanding the above, you should consider resigning if they refuse to modify their practices and should talk that over with your counsel.

[BG5150]

Send them a list of bad things that will happen if the plan gets disqualified.

If they feel the need to ignore you and continue with doing this, I would fire this client.

[justatester]

Ok...so say you bring it to the client's attorney and the client's attorney does not have an issue if the plan has 415 excesses? In this plan's case, it is a match "true up" that causes the issue. So each and every year, by allocating the true up contribution, they cause participants to exceed the 415 limit.

[Mike Preston]

Well, assuming you've done what you consider appropriate in the circumstance, you just have to decide whether you want to be a part of this or not. Perhaps your counsel talks with theirs?