Deferral Changes

[Guest johnpetrancosta]

Relevant Facts:

1. Plan Document allows deferral changes only January 1 and July 1.

2. HCE Owners increased their deferral percentage in August.

3. The request was NOT made by July 1 - i.e. it was not a delayed implementation of an election effective July 1.

4. NHCE's were NOT given the opportunity to change their deferrals.

What is the correction?

a. VCP submission with retroactive amendment? - my problem with this is there's no way to know who if any NHCE's would have changed their deferral.

b. Disallow the election to increase the deferrals and refund the amount in excess of the original election as "excess contributions", including the related match and earnings.

[ETA Consulting LLC]

I would definitely say VCP. Keep in mind that every VCP filing does not include an identification of a "perfect fix". What is does, however, is clearly identifies the issue and the changes that are made to ensure the issue does not recur. As for how the current issue is being resolved, sometimes there isn't an action to be taken (or at least the action will be negotiated with the IRS agent when the case gets assigned). As far as how to prevent it from happening again, I would amend the plan to allow anyone to change their elections at any time.

Some things within qualified plan operations are just too simple to screw up; and this is typically one of them I mean this with respect to putting a restriction in place just to let it go unenforced.

Good Luck!

[12AX7]

I'm not seeing why this has to go to VCP. Why not allow all participants the ability to currently change their deferral election and/or increase amounts of deferrals to make up retroactively for the "lost" deferrals.

VCP seems a little extreme after considering that very few if any participants may have wanted to changed their deferral election at the the same time the HCE made their increase. At worst, could you not consider that there was a lost deferral to be made up (self-correction)? It's only been one month since any other participant could have elected the change in deferral.