Rollover into a plan that doesn't allow rollovers

[katieinny]

In 2012, an employer permitted an employee to roll assets over from her previous employer's plan. Somebody just realized that the plan document does not permit rollovers. My initial thought was that this can be self corrected under EPCRS by amending the plan. But after reading Rev. Proc. 2013-12, Section 4.05(2), rollovers are not mentioned in Section 2.07 of Appendix B which means that the employer must go through the VCP correction program. Does anyone else think that this is a bit extreme for this type of error?

[QDROphile]

What does it matter what anyone thinks?

[katieinny]

Okay, QDROphile, you're right -- but I wonder if others might make executive decisions in their practices to self correct this type of error, especially since a hardship feature or a loan feature can be amended into a plan under the self correct program. My thought is that adding the ability to rollover money into the plan is just as innocuous. The VCP filing fee is one thing, but by the time the employer pays somebody to prepare the filing, we could be talking money way out of proportion to the problem. At some point, common sense should prevail. So, I was wondering what other practitioners might do in this situation. However, I asked for their thoughts, when I should have been more direct with a "what would you do?" type of question.

[PensionPro]

You have the option to get the rollover out of the plan.

[QDROphile]

The sponsor can assess the risk and amend the plan without correction. In other words, don't amend with a retroactive effective date. The retroactive effective date will get unfavorable attention on audit and in determination letter review. A rollover account in a plan that has a rollover provision will not stand out for attention to the timing. Ideally the amendment would not be a stand alone amendment. The plan auditors (not the IRS auditors) may be more likely to observe violation. If the matter is taken up in an IRS audit, the penalty should not be terrible, but it would be lucky to get away free.

If you take the rollover out of the plan, the you will have to contemplate asking for a letter ruling that the mistake does not prevent preserving tax deferral by putting the money in an eligible rollover vehicle, such as an IRA. A letter ruling would be just as bad or worse than VCP.

[katieinny]

PensionPro -- as a matter of fact, the rolled over dollars are being distributed because the employee has already terminated service only a few months after being hired. But, I didn't think that changed the fact that the plan needed to be amended to permit the rollover in the first place. Since the assets are being distributed anyway, are you saying that that takes care of the matter and I'm overthinking this whole thing? Just get the assets out and be done?

[PensionPro]

We had a situation where the plan did not allow Roth rollover, but the employer accepted a Roth rollover anyway. We amended the plan prospectively. The participant, an NHCE, terminated and took a distribution shortly. So there was a sliver of time where the plan had an operational failure. The risk was fairly minor. It is highly likely an IRS auditor would not have noticed such a failure in the first place.

[katieinny]

Thank you for your replies. They will help me formulate my comments to the employer.

[shERPA]

Since the impermissible rollover is now being distributed, it seems to me this will properly correct the operational error under EPCRS self-correction within the permissible two-year period. All's well that ends well, but recommend to the employer that the plan be amended to accept rollovers now so it doesn't happen again.

[masteff]

Since the impermissible rollover is now being distributed, it seems to me this will properly correct the operational error under EPCRS self-correction within the permissible two-year period.

I agree. Make a note for the file that personnel have been instructed re: the acceptance (or non-acceptance) of rollovers.

[katieinny]

shERPA: Yes, I guess I focused in on Section 2.07 of Appendix B for some reason and suddenly I had blinders on instead of thinking of it as simply an operational error and getting on with it. I have suggested that the employer amend the plan going forward just in case this happens again.