Vesting Computation Period

[oldman]

We have a P/S plan sponosred by a tax-exempt 501©(3) organization and the plan provides that vesting computation period for determining vesting years of service will be the plan year. However, the plan has been administering the plan with the computation period defined as the participant's employment year. Recognizing this as an operational error, what is the recommended correction to this error?

[12AX7]

What has been the implication of calculation error? Were participants that had terminated employment perhpas paid-out too much or too little?

[oldman]

Plan has not done review to determine impact to participats' (active and terminated) vested accrued benefit. Employer is anxious to take corrective action to bring plan into compliance.

[12AX7]

I would first look to see how distributions (and possibly loans) may have been affected by the vesting calculation error. If there is low impact from the calculation error (e.g. participant not paid-out the full vested benefit), the correction may not be as onerous.

[ESOP Guy]

The other thing one could do but might cost more is a VCP filing. My (limited) experience is when a plan has done something that is legal but not in plan document the IRS will often times allow the VCP solution to be simply change the document and move on. This is tends to be true if everyone was really treated the same way. This solution however would be best if one uses a lawyer that has experience with VCPs so there are those costs and the VCP filing costs.

[12AX7]

ESOP Guy, I think you would have to first look to see how many years the calc errors go back to. I can perhaps understand that an error was made in the drafting of the current document and you now want to go back to correct it, then VCP may work. What if the error goes back more than one plan document, or to the inception of the plan? Would VCP work in that situation? I don't have that type of experience to provide guidance.

Oldman needs to get back to us with additional information.

[oldman]

Plan document was restated with an effective date of 1-12009. Plan year is the calendar year. Prior plan document defined vesting computation period as participant's employment year, but restated plan doc computes year of vesting service as the plan year. It would appear that the employer needs to review participant's vesting service for plan years beginning 1-1-2009 and credit service that would be equal to the GREATER of service credited under the plan year computation method up to an including the entire 2013 plan year; or service taken into consideration under the participant's employment years up participant's anniversary date occuring in 2013.

What do you think?

[masteff]

Don't jump straight to VCP... self correction may be a valid option: http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-the-Self-Correction-Program-(SCP)#6 We have several factors that need to be investigated before excluding self-correction as a possibility.

For anyone who's still in the plan, you have at most a clerical error on their statement in showing their vested balance. In my opinion, for a faulty vesting calc, you don't have an actual error until you take an action based on the faulty calc. So you can narrow your immediate concern to any distributions since 1/1/09 that were not 100% vested.

[rcline46]

Also remember, if vesting is based periods of service, that is - Elapsed Time and not hours, it must be on employement years.

[ESOP Guy]

ESOP Guy, I think you would have to first look to see how many years the calc errors go back to. I can perhaps understand that an error was made in the drafting of the current document and you now want to go back to correct it, then VCP may work. What if the error goes back more than one plan document, or to the inception of the plan? Would VCP work in that situation? I don't have that type of experience to provide guidance.

Oldman needs to get back to us with additional information.

I think VCP could work and end with the IRS accepting practice as what the document should say in either of those situations-- error through several drafts or more recent.

Give in this situation if was just from the last draft it makes the case that the old method was always intended more strong.

Lastly, my call for a VCP was just an option. I view some of the other options stated as valid choices. I just mentioned VCP here because I think many people fear the IRS' reaction in a VCP and over the years the times I have been part of a VCP I have found the IRS accepts the propose correction most every time as long as it is reasonable. The down side is cost.