Participants Affected by a Failure

[Scott]

I'm trying to analyze the 7 factors under Rev. Proc. 98-22 that determine whether an operational failure is insignificant for purposes of APRSC. Two of the factors focus on the number of participants "affected" by the failure.

Here's the issue: Because of an error in payroll processing, certain items were erroneously excluded from compensation for purposes of calculating accrued benefits under a defined benefit plan. As a result, a number of participants' accrued benefits were less than they should have been. Of those participants:

(1) some terminated and received distributions before the error was discovered;

(2) some terminated without a vested benefit before the error was discovered;

(3) some terminated before the error was discovered, but the error was discovered while processing their distributions, and they received the correct amount;

(4) some are still active, and their accrued benefits will be adjusted to reflect the correct amount; and

(5) some are still active, but the period of time during which the failure occurred would not constitute their "high 3-years pay," so their compensation for that period would not be considered under the benefit formula, and thus would not affect their accrued benefits.

The question is, which of these groups of participants is "affected" by the operational failure? Would it be all of them, since the failure affected the determination of compensation for everyone? Would it be only those who received an erroneous distribution? Or would it be something in between?

My thought is that group (1) is clearly affected, while groups (2) and (5) are not. Groups (3) and (4) are somewhat iffy. These groups may have been technically affected because their accrued benefits were wrong for a time, but the failure has not caused them any harm because they have received (or will receive) the correct amount.