Oops...someone forgot to cap matching contribution

[Gudgergirl]

Plan has always provided for a 50% match on elective deferrals and capped the match at $1,000. In the EGTRRA restatement, the document preparer omitted to check the box capping the match. Error has now been discovered a year later. Matches are still being made according to the old plan document that caps match at $1,000. Error was caught by document prepaper (who admitted that similar errors were made in other plans). Matches are made on a payroll basis.

I was hoping to correct this by retroactive amendment under VCP. Section 4.05(1) of Rev Proc 2008-50 states: A Plan Sponsor may use VCP and Audit CAP for a Qualified Plan to correct Plan Document, Demographic, and Operational Failures by a plan amendment, including correcting an Operational Failure by plan amendment to conform the terms of the plan to the plan's prior operations, provided that the amendment complies with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and 411(d)(6).

A retroactive amendment of this nature seems to obviously be a violation of the anti-cutback rule.

The other alternative is to amend prospectively and make uncapped matching contributions for participants for the time period between the effective date of the EGTRRA Restatement and the date of the prospective amendment. However, this is an extremely large amount of money and would cause the sponsor a financial hardship.

Does anyone have any insight/ advice on how to correct this error?

[Guest Sieve]

Either of your approaches has merit. Under the circumstances, I would:

• Amend the plan, retroactively, to correct the scrivener's error and return to the $1,000 cap for the year. Apply under VCP for approval of the retroactive revision, using as evidence the fact that the TPA/attorney/whoever made like mistakes with other capped plans and that the plan has been adminsitered with the cap for XX years (and, if correct, from its inception). The IRS can still approve, even if it would otherwise be a cutback; AND
  
• Amend the plan on a prospective basis only. I think I'd do this even if you apply under VCP (above), and make the prospectve revision contingent on failure to obtain approval of the VCP application (which would effectively trump this amendment, anyway); OR
  
• Ask the document preprarer to apply under VCP for a Group Submission correction (although the user fee ($20,000, I think) may be too steep for the nunber of plans involved). There's a better chance of acceptance of the retroactive change if the IRS is presented with a systemic error by a document preparer.
  

[TPApril]

Similar situation in that plan document preparer submitted restated 401(k) plan with a typo in a provision related to eligibility to defer. Plan continued to operate under prior provisions, SPD reflected prior provisions, and document preparer has now amended the plan to correct for the typo. It seems to have been an isolated case by document preparers, but could cost plan sponsor significantly to submit VCP. Would maintaining all records with history of adhering to prior provision enough as SCP?