Operational Failure in SARSEP

[Spodie]

Our firm has agreed to do administration for our first SARSEP (administration only for 2012). Upon review of the adoption agreement, we discovered the employer contribution has not been allocated according to the plan provision since inception (1994). The document states Pro-Rata, but the contribution has been allocated as Integrated.

In reviewing the latest EPCRS, I find a correction for this issue on a SARSEP to be a bit confusing. Since the plan has been operated using an Integrated formula since 1994, they are not interested in following the correction for an Excess Allocation, but would rather amend the plan retroactively and ask for the Service’s blessing.

According to 6.11 (1) Correction for SEPs generally is expected to be similar to the correction required for a Qualified Plan with similar failure.

According to 6.11(2) if 6.11(1) is not feasible for a SEP or determined by the Service…..Excess Amounts for cases in which there has been no violation of a statutory limitation with respect to a SEP, the Service may provide for different correction. Special fee my apply.

Can this failure be corrected by plan amendment under VCP? And if so, which Schedule; 1 or 3 or both?

Schedule 1 appears to allow for correction by plan amendment, but only if the corrective amendment was adopted before the expiration of the plan’s extended remedial amendment period for that amendment. Do SARSEP’s even have a RAP?

Schedule 3, specifically for SEPs provides for Excess Amounts Contributed & Retention of Excess Amounts, but does not appear to offer correction by plan amendment.

Also with regards to the filing fee. Fee for Qualified Plan is $750 (20 or fewer), and for a SARSEP it is $250. Would we send in the $250 and wait and see if the Service would impose the $750?

Any enlightenment is greatly appreciated. I’m out of my element here.

Thank you

[Flyboyjohn]

Unless you're a law firm I'd recommend engaging the services of the proverbial "good ERISA attorney" since as you say you're out of your element

[Gary Lesser]

Do you have ALL plan documents going back to inception of plan? The plan was likely amended in 2002. Thus, the plan in existance prior to 2002 may have been an integrated prototype. That being said, you do have a bunch of problems. In addition to a bunch of over and under contributions, there are all sorts of penlties that have to be addressed. I would not suggest VCP to fix this plan; in addition, the problems could be considered egregious if not handles skillfully.

The plan can be amended for 2013 (to be integrated), but not retroactively. I would also suggest an ERISA attorney that has also handled SEPs as they have some unique properties and a very unforgiving (a bunch of 6% cummulative and 10% penalties).

Hope this helps some.

[Spodie]

Thank you for your response. I'll pass this along to our Partners. We had only agreed to do the administration for this plan as a tester to see if it would be something we may be interested in pursuing.