After-tax money in plan that was not permitted.

[Santo Gold]

Got a mess with this one. Going back 15+ years, the plan has allowed after-tax contributions but the plan document has not allowed for it. A mix of HCEs and NHCEs. Am I correct that the only way to resolve is to payout these amounts plus the earnings? The earnings are taxable but is there any penalty. Also, would this appear to be a VCP filing?

Wishful thinking, but there is no permissible retroactive amendment that can be used to allow the contributions to stay in the plan is there?

Thanks

[MWeddell]

This will not be eligible for self-correction in my opinion. Considering how widespread the error is and that it began more than 2+ years ago, the operational failure is "significant" as that term is used in the Employee Plans Compliance Resolution System revenue procedure.

Since you probably will recommend to the client that it do a Voluntary Correction Program filing, then also suggest:

- They consider proposing to amend the plan document retroactively to allow for after-tax contributions as a correction method.

- They retain legal counsel to advise them and work with you on preparing the VCP filing.

[Santo Gold]

MWedell:

Thanks. Regarding the retro amendment, is that something that they would submit, via VCP? And if accepted, then there really is no "consequence" as far as having to make distributions of the after-tax monies? Is this something that is likely to be acceptable?

Thanks

[ESOP Guy]

I think you would be shocked what gets approved via VCP. In this case the most rational answer is to keep the money in the plan.

To me the worse case would be the IRS makes you take the money out of the plan. Best case is they allow it to stay.

I think the VCP filing with a reto amendment is a good thing to try with the right attorney.

[PensionPro]

Similar but not same situation. One NHCE was allowed to rollover AT money into plan even though doc does not permit it. It seems they can self-correct by removing the money from the Plan or file VCP and do a retro amendment. VCP is too expensive in this situation given the participant count. Any ideas?

[MWeddell]

Santo Gold,

Yes, according to the EPCRS, if you are going to correct it by making a retroactive amendment to the plan document, it has to be a VCP filing, not a self-correction.

PensionPro,

Seems like you'd want to self-correct by reversing the invalid portion of the rollover. With just one participant affected, it seems like an insignificant operational failure. Of course, there are a host of other conditions to use the self-correction program.

[david rigby]

No matter what resolution, make sure you consider the future: what do you need to do to make sure this does not happen again?