Correction of formula for employer contributions where plan and actual practice differ

[Guest ebguy]

Client has a profit sharing plan with several companies that participate. Client's intent and practice has been for each company to make a discretionary contribution to the plan based upon that company's performance and then allocate that contribution among that company's employees. Therefore, each participaing company makes a different contribution, i.e. two employees making the same amount of money working for different companies will receive different amounts. The plan however states that contributions from participating employers will be pooled and allocated among all participants, i.e. two employees making the same amount of money working for different companies will receive the same amount. If there is a correction that retroactively credits accounts based upon what participants should have received under the terms of the plan, employees that work for the well performing companies will lose money from their accounts (which is bad for morale) and employees that work for lesser performing companies will gain money (which was not the intent of the client.) What are the chances that the IRS will allow a correction to comply with the client's intent as opposed to the terms of the plan document?

[ETA Consulting LLC]

Client has a profit sharing plan with several companies that participate. Client's intent and practice has been for each company to make a discretionary contribution to the plan based upon that company's performance and then allocate that contribution among that company's employees. Therefore, each participaing company makes a different contribution, i.e. two employees making the same amount of money working for different companies will receive different amounts. The plan however states that contributions from participating employers will be pooled and allocated among all participants, i.e. two employees making the same amount of money working for different companies will receive the same amount. If there is a correction that retroactively credits accounts based upon what participants should have received under the terms of the plan, employees that work for the well performing companies will lose money from their accounts (which is bad for morale) and employees that work for lesser performing companies will gain money (which was not the intent of the client.)

Morale and intra-office political issues aside, you have a plan that has failed to follow its written terms of providing each participant under the plan a uniform allocation amount. A VCP submission would be a way of sorting this out and attempting to amend the plan, retroactively, to conform to the way it was always operated.

What are the chances that the IRS will allow a correction to comply with the client's intent as opposed to the terms of the plan document?

There is a chance. The IRS is certainly not going to take it lightly, but in well documented instances (i.e. the various levels have been communicated through company memos to employees but not reflected in the SPD or Plan's document) the IRS "MAY" allow for a retroactive amendment reflecting the employer's original intent.

Good Luck!