What is insignificant failure under APRSC?

[Guest Karens]

We were engaged to do a first year audit of a profit sharing plan during which we discovered several operational defects. The discretionary profit sharing contribution was not allocated according to the terms of the plan for the years ended 10/31/98, 97 and 96. In addition, when they calculated the discretionary match contribution of 50 % up to the first 8% of compensation they used gross compensation rather than compensation net of 401(k) and Section 135 Plan contributions as required by the Plan document.

There are about 130 plan participants and all were affected by the incorrect allocation of the profit sharing contribution with the exception of the highly compensated employees who elected not to participate in the profit sharing plan. The amount of the profit sharing contributions were $50,000, 40,000 and $9,000 for 10/31/98, 97, and 96 respectively. The total plan assets are approximately $1,8 million.

The match contribution effected about 30 people out of 130 for 98, 97, and 96. The total amount of excess contributions on non-highly compensated employees is about $3,000 for each year. No non-highly compensated employees received excess matching contributions as they had refunds made to them in order to pass the ADP/ACP test each year. The error occurred in 1995 as well but records cannot be located for that year.

ISSUES:

1)What is the likelyhood that the IRS would consider the 96 profit sharing plan contribution insignificant and therefore eligible to correct under APRSC (eventhough the two year correction period has passed)? If allowed, would they accept reallocation as a method of correction eventhough SVP requires additional contributions?

2) Should this be corrected under APRSC or submitted to VCR to receive IRS approval of the correction?

3) Regarding the matching contribution the client does not want to make the corrections as we have only estimated the differences. In order to be exact we would need to look at all of the deferral election changes in effect during each year to ensure that the proper match has been made. In addition, if we refund these excess matching amounts the ACP test will fail as the test originally failed each year but refunds were made the HCE's to pass. With the 96 year affected we could not longer make refunds to the HCEs and then would be required to make QNEC's to pass the ACP test for each year.

If the excess matching contributions are considered insignificant and it is administratively unreasonable to correct the defect, and the error is in the favor of non-HCE employees would they still require us to fix this? We would like to amend the plan prospectively to adjust for this error. It doesn't seem worth it to pay $8,000 to submit the plan under Walk-in Cap to be able to amend the plan retroactively. Any thoughts on this.

Any help you could provide in this area would be greatly appreciated. We are trying to help our client correct the issues so that we can issue an unqualified audit opinion in the near future.

Thanks for your time!

Karen

[Ervin Barham]

Please note that the IRS stated in Rev Proc 98-22 also noted that "multiple failures must be insignificant in the aggregate". It appears that you have more than one failure beyond the two year period. I would be very cautious about trying to use APRSC for something like this.

By submitting under VCR (not SVP), you always have the opportunity to propose (whether it is accepted or not is another story) any reasonable method of correction.

You can also contact the IRS on a "John Doe" basis about the Walk-in cap correction to see if there is a lower amount and whether the IRS might allow the retroactive amendment.

I'm not sure I understand your statement that the client does not want to make the corrections for the match. If that is the case, then there is no point in any of this excercise as they are wasting everyone's time. If you are going in, clear it all up!

Please note that this situation is impossible to completely answer without looking at all the facts - have your client contact a good pension attorney!

[Guest Karens]

As a follow up to Ervin Barham's response:

What is your experience with the IRS assessing a lower fee under Walk-in Cap than the presumptive amounts listed in the Rev Proc 98-22?

For our client, we are weighing the known $1,250 VCR filing fee with the presumptive amount of $8,000 under Walk-in Cap.

Regarding your comment on client not wanting to correct match: The client has agreed to reallocate the profit sharing contribution which may be submitted under the VCR program. However, due to the consequences of refunding the matching contributions (ie failing ACP test and then making QNEC's) they do not want to spend the additional amount on professional fees to perform the additional calculations to correct.

If we submit the profit sharing allocation correction under the VCR program and then include the facts surrounding the match contribution (ie immaterial amount, administratively burdensome to correct, etc) and propose not to correct the match do you think there is any chance the IRS will accept the VCR filing? or will they force us to correct the match contribution?

Alternatively, would we be better off doing a "John Doe" filing under the walk-in Cap program and requesting retroactive plan amendment for the match contribution and include the reallocation of the profit sharing contribution in the walk-in cap filing?

Thanks for your time and for your input.

Karen

[Ervin Barham]

I think most of the questions you are asking at this point may be unanswerable except by the IRS. I don't have any actual experience with the IRS reducing that fee - so I have no way of knowing whether they will or not! You also have no way of knowing without contacting on a John Doe basis whether the IRS will even allow a retroactive amendment. You might try looking at the Plan Defects Q&A column by Reisch & Luftman elsewhere at this site to give an idea.

Certainly an $8,000 presumptive fee is steep, but I think in this case you weigh the total costs - what is the cheapest alternative for the client - including the professional fees to correct.

I'm not sure I can be of any further help on this - this now becomes a judgement call for you and your client.

Good luck.

[Guest Rita]

Because there is no written policy, and my company failed to inform me, I have recently learned that I could have been participating in a matching stock plan. The company now wants to have me give them a lump sum for the amount I could have contributed, and they will match it -- at today's stock prices. Otherwise, my only choice is to just participate from here forward. Are there any rules that dictate whether what they propose is legal & ok with the IRS?

[Guest Karens]

Is there any guidance on how to correct the error when an employer does not withhold the correct amount of 401(k) contributions? Example, employee requested that 8% of compensation (around $2,100) to be withheld but employer only witheld $520 for the year. The employee received the full matching contribution.

APRSC describes the method for correcting when an employee was excluded from participating in a 401(k) plan which is the employer making a contribution for the employee equal to the ADP of the NHCE prior to the correction. Would this same principal be expanded to require the employer to make up the contribution which the employee did not make due to the employer's error? Or is no contribution required as the employee should have known what was withheld from her paycheck was not what she had requested?

Any guidance you can provide would be greatly appreciated.

Thanks!

Karen