Employees not allowed to defer because of contract with employer

[jkharvey]

Our client is a government contractor and several of the employees are part of a contract under the Service Contract Act. Their contract specifically does not allow them to receive benefits. I know that I need to make sure our plan document excludes them and that all testing is passed. For one year, however, our document was not correct to exclude these people. Does anyone know if DOL and/or IRS will accept that the contract did not allow for deferrals and then we can correct this under SCP?

[QDROphile]

I think the problem is that the employer should have amended the plan to exclude certain employees in a particular job class, but did not. The employees were excluded. The plan was not operated in accordance with its terms. Now whta do you think?

If you think the correction is to amend the plan to fit the exclusion, that cannot be done under SCP. It is also not the type of retroactive amendment that Rev. Proc. 2013-12 anticipates, but that does not mean the IRS will not approve it. I don't know what the proscriptions really are under under the circumstances, but I would be inclined to find a different approach to correction, even under VCP. I find it hard to believe that the contract prevented employees from deferring compensation that was otherwise permissible, but government contracts can be as stupid as union contracts.

[jkharvey]

Thanks. I agree with what you have said. The one thing I didn't explain very well is that the govt. contract specifies that the contractor (employer) won't be reimbursed for benefits. The employer, therefore, would pay for those outside of the costs being reimbursed. That is not exactly as I described it above. Sorry. That doesn't change anything as far as the plan's qualification issue, however. Thanks again.

[QDROphile]

Then I predict that the IRS would not allow retroactive amendment and I think that the correction would be a garden variety improper exclusion, or a failure to implement if the employees submitted salary reducton agreements that were not given effect.