Why correct an insignificant violation?

[JRN]

I am struggling with deciding whether an employer should correct an insignificant violation. Here's what happend: Employer paid holiday bonuses. Plan docment does not exclude bonuses from definition of Compensation. Employer did not apply employees' 401(k) elections to holiday bonuses. Correction would be for employer to contribute 50% of missed deferral amount plus employer match (also 50%).

Employer's intent (despite plan docment language) was not to withhold 401(k) on holiday bonus. And, one could argue that employees' intent was same, because no employees came forth and complained. Error was picked up by CPA auditor.

I am pretty comfortable that this violation is insignificant. So, why should employer voluntarily make corrective contribution now under SCP? Why not wait and correct only if IRS later raises this issue on audit? Because this is an insignificant violation, employer could presumably self-correct then.

I guess the risk is that the IRS could on audit take position that violation is significant - in which case (assuming 2 years has passed by then) employer could not self-correct and would be stuck with negotiating IRS compliance fee.

I will appreciate any thoughts.

Thank you.

[K2retire]

The other risk is that the auditor who pointed it out will include it in the audit report for the 5500 as an uncorrected issue.

[MoJo]

I guess the risk is that the IRS could on audit take position that violation is significant - in which case (assuming 2 years has passed by then) employer could not self-correct and would be stuck with negotiating IRS compliance fee.

I will appreciate any thoughts.

Thank you.

Keep in mind, as well, that every participant is a potential plaintiff. What is the value of the missed deferral and match projected out to one's retirement date? May not be "insignificant" to them.

[Everett Moreland]

I believe that the following sections 7.02(6) and 7.03 from RP 2008-50 indicate that failure to correct the failure may cause it to be significant:

.02 Factors. The factors to be considered in determining whether or not an Operational Failure under a plan is insignificant include, but are not limited to: (1) whether other failures occurred during the period being examined (for this purpose, a failure is not considered to have occurred more than once merely because more than one participant is affected by the failure); (2) the percentage of plan assets and contributions involved in the failure; (3) the number of years the failure occurred; (4) the number of participants affected relative to the total number of participants in the plan; (5) the number of participants affected as a result of the failure relative to the number of participants who could have been affected by the failure; (6) whether correction was made within a reasonable time after discovery of the failure; and (7) the reason for the failure (for example, data errors such as errors in the transcription of data, the transposition of numbers, or minor arithmetic errors). No single factor is determinative. Additionally, factors (2), (4), and (5) should not be interpreted to exclude small businesses.

.03 Multiple failures. In the case of a plan with more than one Operational Failure in a single year, or Operational Failures that occur in more than one year, the Operational Failures are eligible for correction under this section 8 only if all of the Operational Failures are insignificant in the aggregate. Operational Failures that have been corrected under SCP in section 9 and VCP in sections 10 and 11 are not taken into account for purposes of determining if Operational Failures are insignificant in the aggregate.

[movedon]

I think that discovering a failure (significant or not) and choosing not to correct it becomes a fraud-ish situation.

[Bill Presson]

I am struggling with deciding whether an employer should correct an insignificant violation. Here's what happend: Employer paid holiday bonuses. Plan docment does not exclude bonuses from definition of Compensation. Employer did not apply employees' 401(k) elections to holiday bonuses. Correction would be for employer to contribute 50% of missed deferral amount plus employer match (also 50%).

Does the plan allow for participants to make a separate election for bonuses? Does the plan allow for participant to change their deferral election at any time? Did the participants say anything whether or not in writing that indicated they did not want 401(k) amounts withheld.

It's possible that some combination of the above will allow the plan to have actually been in compliance.