File VCP application before corrective contributions made?

[waid10]

I am preparing the file a VCP application for various 401(a) plan failures. My question is whether other ERISA attorneys advise their clients to make the corrective contributions prior to filing with the IRS? Or do you prepare the VCP application so that the correction is in proposed form, and then wait for the IRS to bless the proposed correction before making the contributions?

I have always made the corrections before filing as I prefer to not wait an additional 6-9 months for the IRS to respond and have earnings continuing to accrue. But I have heard other attorneys feel differently.

Any thoughts?

[John Feldt ERPA CPC QPA]

I am not an ERISA attorney, so this post is just FWIW.

From my experience, it depends on the solution desired to "fix" the problem.

In some of cases, the correction proposed was quite different than any suggestions found in Rev. Proc. 2008-80, and because of this, we recommended that no fix be done until the IRS agrees. In one situation, regarding what actuarial equivalence to truly use for valuing some very old underpaid amounts, the IRS agreed with the proposed solution without modification (it took some convincing, but they agreed).

In another case, an ADP test failure was fixed with a much smaller QNEC than what an employer can normally get by with, but in this case the IRS would only agree if some additional interest was added for missed earnings. In that case, a fix being done early would have only caused additional work to fully fix it later.

If you aren't trying to create a solution that is outside the box as far as Rev. Proc. 2008-50 is concerned, then fixing it before the approval is granted probably carries very little risk, especially if you've thought through how every aspect of the plan might be affected by the error, and it's covered under 2008-50.

However, sometimes it is not possible or not feasible to truly place the plan back into the position that it would be in today if no error had occurred. You may need to be creative it those cases. That's when I would suggest that the correction be placed on hold until the IRS finds their "approved" stamp.