Responsibility of new TPA for error by prior TPA

[Guest W J Parks]

Our firm has assumed responsibility for a 401(k) plan as of 1/1/99. In reviewing the files for 1998 we discovered the plan was "Top Heavy". The prior TPA advised the client of that fact in 1998; however, the minimum contribution was not calculated properly - Entry Date compensation was used for new entrants rather the plan year compensation.

One of our staff feels that unless the client corrects the problem we will be held liable as we know about the problem. Others disagree with that position. Question: who is correct?

Also, another staffer feels that if the client makes up the shortfall (and includes earnings) by 12/31/99 under the VCR program, this will correct the problem, HOWEVER, they feel the corrective deposit is not deductible. Their rationale is that since the corrective deposit relates to 1998 and that year is closed no deduction is possible. Another staffer feels that if the 1999 contributions plus the 1998 correction are within the 1999 415 limits the full amount is deductible in 1999. Who is correct or is there another answer?

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W.J. Parks, Jr., CLU, ChFC, JD, LLM

[Guest rhp]

Check out Rev. Proc. 2000-16 section 6.02(5)(B) on the latter set of issues.

[david rigby]

Rev. Proc 2000-16 begins on page 56 of Internal Revenue Bulletin 2000-6.

(Requires Adobe Acrobat)

http://www.irs.gov/bus_info/bullet.html

[Guest Mike Kimball]

what does your engagement agreement say? I agree with answer on deductibility for 1999, provided 415 and 404 are met.

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[Guest JAREL]

I believe the answers are as follows:

1. The contribution is an annual addition for the year it is attributed to, or 1998.

2. The contribution is deductible in the year contributed, or 1999. Therefore, it has to satisfy 404 in 1999.

3. The interest on the contribution is deductible in 1999 (when paid) as damages, generally a business expense as opposed to a plan contribution under 404.