Is this an operational or form defect?

[Guest Do]

Is it VCR or Reformation CAP, if the plan document says: in order to provide for a specific feature, the appropriate box on the adoption agreement must be checked off? For instance, the plan says all employees are in the plan except for the types of employees indicated on the adoption agreement. If the sponsor kept out a type of employee but didn't check off the appropriate box, is it an operational defect or form defect. Another example is participating employer who did not adopt the plan. The plan requires an employer other than the sponsor to adopt the plan. The other employer never adopted the plan. Is this an operational defect or a form defect? I guess the principle I am looking for is something that holds: if the plan document requires a plan document change, the failure to do so is a form defect; or if the plan document requires a plan document change, the failure to do so is an operational defect.

[M R Bernardin]

What you are describing are operational defects, because in both instances the plan sponsor failed to follow the terms of the plan as they existed (not as the plan sponsor would perhaps have liked them to read). The failure to specifically exclude a group of employees did not cause the plan document to fail a form qualification requirement. As for reformation cap, it is not guaranteed that the IRS will let you do that; they may instead require the plan sponsor to conform its operations to the plan document. I imagine they would let the adopting employer sign on to the document, but I would be surprised if they let you exclude a group of employees who were otherwise eligible under the terms of the plan. Anybody disagree? Maybe a better approach with regard to the NRAs (I was following the other thread) is to request a Private Letter Ruling that they are ineligible because of no U.S. earned income.

[Guest Do]

I have asked several attorneys, within and outside of my firm, and the count is about 50/50 on which principle is correct (either: 1)if the plan document requires a plan document change, the failure to do so is a form defect; or 2) if the plan document requires a plan document change, the failure to do so is an operational defect). One thought that arose from the chatting (which scares the hell out of me) is that EPCRS isn't available because there is no plan, with respect to the employer that didn't sign, to submit. This may be a case where audit roulette is worth the gamble. Then again, if we decide to take the position it is a form defect and that the defect is insignificant (just the failure to sign, not the NRA problem), we may do APRSC and see if an auditing agent has the audacity to challenge the committee resolutions.

Thanks M R Bernardin for your thoughts. I hope you invoke more discussion.

Anyone else want to make a vote?

[M R Bernardin]

I did a Walk-In CAP where the problem was the employer's failure to sign. This was before EPCRS, which came out during the process of the CAP filing. I do not know if EPCRS would change the ability to file under CAP, but I believe the IRS would allow correction in most instances because to do otherwise would be to harm innocent participants.

[Ervin Barham]

This is one of those issues where I can argue one side and then turn around and argue the other side.

In the situation where you have a plan document with two related employers (basically the same owner) and one employer fails to sign a participation agreement, but has made contributions to the plan, has anyone run this by the IRS on a John Doe basis?

Certainly, innocent participants would be harmed, but I can make the argument that since the employer failed to sign, the plan was never in place. Certainly the debate would be whether to use Walk-in Cap or self-correct and play the audit lottery.

Any comments?