Ineligible Employee Deferrals/Match to be corrected by Plan Amendment

[Sully]

I have a client with a calendar year 401(k) safe harbor match plan. We recently discovered that the employer let 1 person join the plan early in 2011 and 2 in 2012. All 3 are NHCE’s. The employer would like to self-correct this under EPCRS by doing a retroactive plan amendment to bring them into the plan. Question: How far back can an amendment like this go? Can we do the amendment today and have it apply back to the 2011 plan year? Could it go back to before 2011?

Thanks in advance for any input.

[ETA Consulting LLC]

Sure. You would go back as long as necessary; it's VCP.

Good Luck!

[Sully]

Sorry if I was not clear, but in this case they are using SCP, not VCP. Does that change the answer?

[Kevin C]

You can self correct insignificant failures at any time. For significant failures, SCP has a correction window that ends on the last day of the second plan year following the plan year the failure occurred. Your first step is to decide if the combined failures are insignificant as that term is defined in EPCRS. See Sections 8 and 9 of Rev. Proc. 2013-12 for details.

Section 8.02 Factors. The factors to be considered in determining whether 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.

[BG5150]

So, if you deem them significant, you have until the end of 2013 to do this.

Also, if I read EPCRS correctly, you HAVE to submit the plan for a DL the next go-'round, and explicitly label the amendment an EPCRS correction.

[Kevin C]

A significant failure for CY 2011 can be self corrected by 12/31/2013, provided the plan doesn't become "under examination" before the correction is made.

Whether or not a DL request is required depends on the type of document and the amendment being made. See Section 6.05(1).

I thought one of the changes for the next restatement cycle for pre-approved plans was that they won't accept a DL request for a pre-approved plan unless you modify the specimen language?

[BG5150]

I thought it was they aren't taking DL requests NOW, unless you are off-language. But that a "regular" restatement window is coming up...

[BG5150]

A significant failure for CY 2011 can be self corrected by 12/31/2013, provided the plan doesn't become "under examination" before the correction is made.

Right. I corrected my original post.

[Sully]

.

Also, if I read EPCRS correctly, you HAVE to submit the plan for a DL the next go-'round, and explicitly label the amendment an EPCRS correction.

For this particular client the errors are insignificant and they are on a volume submitter document. Given this, I believe 6.05(1) of EPCRS provides an exception to the requirement that the plan be submitted for a determination letter.

Note: Relius had a good article (Technical Update) on this issue back in March. Not sure if I am allowed to post a link to the article.

[Kevin C]

The following is from Rev. Proc. 2013-6, Section 8:

Modifications to Revenue Procedure 2011-49

.02 Rev. Proc. 2011-49 is hereby modified as follows with respect to determination letter applications filed on or after May 1, 2012:

(1) An adopting employer of an M&P plan (whether standardized or nonstandardized) may not apply for a determination letter for the plan on Form 5307.

(2) An adopting employer of a VS plan may not apply for a determination letter for the plan on Form 5307 unless the employer has modified the terms of the approved plan and the modifications are not so extensive as to cause the plan to be treated as an individually designed plan.

(3) An application for a determination letter for an M&P or VS plan that is filed on Form 5300 is treated as an application for an individually designed plan, requiring the plan to be restated to take into account the Cumulative List in effect when the application is filed, unless the employer is filing the application solely for one or more of the following reasons:

(a) The employer has modified the terms of the M&P plan by adding overriding language necessary to coordinate the application of the limitations of section 415 or the requirements of section 416 because the employer maintains multiple plans.

(b) The plan is a pension plan and the normal retirement age under the plan is lower than 62. In this case, a determination letter is required for reliance that the plan's normal retirement age satisfies the requirements of section 1.401(a)-1(b)(2) of the regulations.

© The employer seeks a determination as to whether there has been a partial termination of the plan, the employer is a member of an affiliated service group under section 414(m), or the employer is a recipient of services of leased employees under section 414(n).

(d) The plan is a multiple employer plan.

(e) The employer is required to obtain a determination letter to comply with published procedures of the Service (for example, in conjunction with a request for a minimum funding waiver).

In the situations described in subparagraphs (a) through (e), the plan does not have to be restated for the Cumulative List in effect when the application is filed and will be reviewed on the basis of the Cumulative List that was considered in issuing the opinion or advisory letter for the plan. An employer that submits an application for a determination letter for an M&P or VS plan on Form 5300 for one or more of the reasons described in subparagraphs (a) through (e) should identify the reason in a cover letter to the application and include a copy of the opinion or advisory letter.

Section 9 of this revenue procedure describes the procedures for requesting determination letters on VS plans where the employer has made limited modifications to the language of the approved specimen plan.

[John Feldt ERPA CPC QPA]

I agree with Sully regarding Section 6.05(1) of EPCRS Rev Proc 2013-12:

"a determination letter application is not required ... if the correction by plan amendment is achieved through ... the adoption of a prototype of volume submitter plan with an opinion or advisory letter..."

For SCP purposes, 6.05(2)(b) starts "Except as provided in 6.05(1) ..."

Does that mean that the adoption of a plan amendment to fix the issue as described under SCP is therefore not subject to D letter submission if you were able amend by using a pre-approved document? Going outside a prototype or a vol sub you must submit.

Here's an small excerpt from that SunGard Relius technical update. Full text is here: http://www.relius.net/News/TechnicalUpdates.aspx?ID=964

Must a plan that adopts retroactive corrective amendment under SCP file for a determination letter for the plan?

EPCRS gives a general rule requiring a determination letter submission:

Except as provided in §6.05(1), in the case of any correction of an operational failure through plan amendment under SCP that is permitted under §4.05(2) …, a plan sponsor must submit a determination letter application for the plan, including the corrective plan amendment, during the plan’s next on-cycle year, or if earlier, in connection with the plan’s termination.

§6.05(1) has exceptions to this general rules:

Notwithstanding any other part of this §6.05, a determination letter application is not required and may not be submitted with the VCP submission if:

1. the correction by plan amendment is achieved through

   1. the adoption of an amendment that is designated as a model amendment by the Service or

      • the adoption of a prototype or volume submitter plan with an opinion or advisory letter as provided in Rev. Proc. 2012-6, 2012-1 I.R.B. 197, on which the Plan Sponsor has reliance (or is treated as having reliance …), or

2. the failure corrected is a demographic failure.

Therefore, if a plan sponsor incorporates its retroactive corrective amendment within its approved prototype or volume submitter document, the plan sponsor not only does not need to submit a determination letter application with respect to the corrective amendment, the IRS prohibits such an application. However, if the plan is on an individually designed plan document, the plan sponsor will need to include the corrective amendment as part of its next determination letter application.

[BG5150]

Therefore, if a plan sponsor incorporates its retroactive corrective amendment within its approved prototype or volume submitter document,

Question is, does the amendment take the plan off prototype or VS? Depending on the wording and content, it might.

[John Feldt ERPA CPC QPA]

Right, so be sure to only use the pre-approved checkboxes if using a prototype and only use pre-approved text (and/or checkboxes) in a vol sub. and stay within the parameters outlined for any "other" open text fields.

[Sully]

Thank you for all of the responses. Very much appreciated.