Ineligible Employee defers during the plan year

[JKW]

I have a plan that allowed a participant to join the plan in 2012 but the participant was not eligible until 1/1/2013. The participant deferred and received safe harbor match during the 2012 plan year. What is the best way to correct this? Can we forfeit the deferral and sh amount? And the plan will pay the deferred amount to the participant?

[Tom Poje]

I'm sure you will get differnt opinions as to what the 'best' way to correct this problem.

The one method described in Rev Proc 2013-12 (this is EPCRS or Self-Correction), easily downloadable

from Appendix B Correction by amendment .07(3)

Since it is described under EPCRS it is guaranteed 'blessing' by the IRS.

Other methods might be possible, and are probably valid, but none carry that blessing that I know of.

(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment

Correction Method. The Operational Failure of including an otherwise eligible employee

in the plan who either (i) has not completed the plan’s minimum age or service

requirements, or (ii) has completed the plan’s minimum age or service requirements but

became a participant in the plan on a date earlier than the applicable plan entry date,

may be corrected by using the plan amendment correction method set forth in this

paragraph. The plan is amended retroactively to change the eligibility or entry date

provisions to provide for the inclusion of the ineligible employee to reflect the plan’s

actual operations. The amendment may change the eligibility or entry date provisions

with respect to only those ineligible employees that were wrongly included, and only to

those ineligible employees, provided (i) the amendment satisfies § 401(a) at the time it

is adopted, (ii) the amendment would have satisfied § 401(a) had the amendment been

adopted at the earlier time when it is effective, and (iii) the employees affected by the

amendment are predominantly nonhighly compensated employees. For a defined

benefit plan, a contribution may have to be made to the plan for a correction that is

accomplished through a plan amendment if the plan is subject to the requirements of

§ 436© at the time of the amendment, as described in section 6.02(4)(e)(ii)

(b) Example.

Example 27:

Employer L maintains a § 401(k) plan applicable to all of its employees who have at least six

months of service. The plan is a calendar year plan. The plan provides that Employer L will make

matching contributions based upon an employee’s salary reduction contributions. In 2007, it is discovered

that all four employees who were hired by Employer L in 2006 were permitted to make salary reduction

contributions to the plan effective with the first weekly paycheck after they were employed. Three of the

four employees are nonhighly compensated. Employer L matched these employees’ salary reduction

contributions in accordance with the plan’s matching contribution formula. Employer L calculates the ADP

and ACP tests for 2006 (taking into account the salary reduction and matching contributions that were

made for these employees) and determines that the tests were satisfied.

Correction:

Employer L corrects the failure under SCP by adopting a plan amendment, effective for

employees hired on or after January 1, 2006, to provide that there is no service eligibility requirement

under the plan and submitting the amendment to the Service for a determination letter.

[Belgarath]

"(iii) the employees affected by the amendment are predominantly nonhighly compensated employees."

This part is often a sticking point. Seems like it is often the owner's kids, or some new HC that was hired.

[JKW]

It was a NHCE, he missed the 7/1/12 entry date by a few days and the plan erroneously let him in. So from reading above if we do the plan amendment to include the participant - do we still have to submit the amendment for a determination letter?

[Tom Poje]

following EPCRS instructions guarantees your method of correction is ok if you ever get audited.

I suspect a number would simply 'let it go', but that comment should not be interpreted as advice one way or another.

I know on the Relius software there is an option 'credit full month for any service'

so by selecting that a person hired anytime in January would be credited with a full month and thus would enter 7/1. Are you allowed to do that? I can't make that decision.

But then if this person was hired 1/2, does he 'complete' 6 months on 7/1 or 7/2?Depends on whether you use inclusive or exclusive logic. I don't think there is anything in the regs to say one way or another.

(In the same way when performing nondiscrim testing there is nothing that requires you to use age definition nearest or last) so unless there was something really specific in the document you could possibly have an arguement one way or another (as long as you are being consistent!)

[BG5150]

It was a NHCE, he missed the 7/1/12 entry date by a few days and the plan erroneously let him in. So from reading above if we do the plan amendment to include the participant - do we still have to submit the amendment for a determination letter?

What kind of plan is it? I've done it numerous times in a Volume Submitter without filing for a determination letter.

[FormsRstillmylife]

The volume submitter is required to file a 5307 with the next round of restatements. Even if there is no other variation, EPCRS self correction requires this later filing.

[SheilaD]

If the sponsor is otherwise a word for word adopter of a volume submitter plan - will the IRS accept the filing? I suppose the amendment takes it out of the word for word adopter category.

[Kevin C]

This situation was one of the questions addressed at the end of the IRS phone forum on EPCRS yesterday. The speaker said you can correct by refunding the deferrals to the participant and forfeiting the employer contributions. She made a brief comment that we interpreted as saying you would correct the W-2, but I don't recall the exact words. Eventually, the recording should be available on the IRS website.