failure to fund safe harbor

[Scuba 401]

company is bankrupt. what is the correction for failure to fund safe harbor non elective?

[ETA Consulting LLC]

The obvious correction is to fund it. That's not intended to be sarcastic. In theory, each employee can sue in order to have their contribution made to the plan; since it was promised them. There are also some qualification issues with respect to failing the non-discrimination test since the safe harbor wasn't funded. There's no easy answer beyond making the contribution.

Good Luck!

[Scuba 401]

The obvious correction is to fund it. That's not intended to be sarcastic. In theory, each employee can sue in order to have their contribution made to the plan; since it was promised them. There are also some qualification issues with respect to failing the non-discrimination test since the safe harbor wasn't funded. There's no easy answer beyond making the contribution.

Good Luck!

there is no chance it will be funded due of course to the insolvency of the corporation. will the IRS even look at this in a VCP?

[ETA Consulting LLC]

This is unchartered territory.

We know that, at the very least, the plan should be tested under ADP. It would be a different fact pattern to suggest the plan failed to fund safe-harbor and failed the ADP test than the plan failed to fund safe harbor and passed the ADP test. If the test failed, then the most reasonable approach would be to issue corrective distributions of the excesses.

Questions could linger as to at what point during the year did the employer realize they would not be able to fund the SHNEC; and why they failed to amend at that time (after the appropriate notice to employees). Not that you can un-ring a bell, but those are the types of missed opportunities that could've prevented a bad situation from being worse.

The major question of "what next" would entail thoughts on both protecting the qualified status of the plan and enforcing the participants rights under the written terms of the plan. VCP "may" be an appropriate course, but would appear to do little to appease the DOL. Sorry, there's nothing more definitive given that this is unchartered territory.

Good Luck!

[shERPA]

Seems to me the bankruptcy trustee should be getting some legal advice on the plan/ERISA side. There may be some resources available to fund the contribution, who decides how any available resources are parceled out? Does a required plan contribution come before other creditors? Is the bankruptcy trustee making fiduciary decisions with respect to the plan? Lots of questions, maybe some answers. Companies with plans have gone bankrupt before, may be some applicable precedents out there.

[Lou S.]

Doesn't VCP imply some correction will be done? In this case it sounds like no correction will be forth coming as the sponsor appears to have no ability or intention of funding the required contribution.

Maybe Walk-in cap where you negotiate a penalty and then try to have it discharged in bankrupcy? Posibly as part of the CAP agreement?

I suppose the IRS could disqualify the plan, especially with respect to HCEs so they can't rollover the distributions.

I have heard of anlogous cases where top-heavy plans went out of business and the IRS allowed them not to fund but I believe that was under audit and not some formal program and i don't have all the facts as I did not directly work on it.

I do agree that ADP testing should be done for the year no SH is being made. Presumably we are talking about the 2011 year?

At any rate, good luck.

[ETA Consulting LLC]

Does a required plan contribution come before other creditors?

I was wondering this, myself.

[John Feldt ERPA CPC QPA]

http://benefitslink.com/boards/index.php?s...st&p=207952

[Belgarath]

Here's another discussion of the issue.

http://benefitslink.com/boards/index.php?s...mp;#entry204793