What fiduciary liability if plan sponsor allows IRS to disqualify the plan

[jkharvey]

Very early in the audit, but the auditor is being unreasonable. We may be able to shift this position, but for general purposes, I have a question. This is a 401k only plan. The only contributions are employee deferrals. The owner does not defer nor does he have any money in the plan. There are 3 HCEs with balances and about 90 NHCEs with balances. If thie plan is disqualified, the only people harmed are essentially NHCEs.

The issue is failed ADP test. When the test was originally run the failure was corrected by recharacterizing as catchup. In preparing for the audit, i discovered that the date of birth had been entered into the system incorrectly and the paritcipant was not actually eligible for catchup. If i had found this without the audit, i would still be in the correction period for SCP. The auditor is trying to play hardball and insist on audit cap.

My question is this. It would be cheaper for the employer to just let the plan be disqualified. That would harm the participants however. Is there fiduciary liability there? Could the participants sue and win for this?

Anyone with experience with an actual disqualification?

Thanks

[Kevin C]

With the plan under examination, SCP is only available to correct insignificant failures( Rev. Proc. 2013-12, Section 4.02). The criteria used to determine if a failure is insignificant are in section 8.02 of Rev.Proc. 2013-12. The agent may be unreasonable about how that criteria applies, but I would exhaust that possibility before moving to something more expensive. We had an IRS agent insist that if more than one factor indicates the failure is not insignificant, then it is not insignificant. There was a discussion of how the criteria is supposed to be applied in an IRS phone forum on EPCRS within the last few years. The speaker was the head of the EPCRS group and his opinion was more reasonable than the agent we had the problem with. The transcript should be on the IRS website.

[Peter Gulia]

Even if a fiduciary might have no separate duty to maintain a plan as a tax-qualified plan, a plan's administrator must "discharge [its] duties with respect to a plan ... in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [ERISA's] title and title IV."

A disappointed participant might allege that a failure to allocate individual accounts according to the plan's provisions (including those that state allocations following the ADP test) resulted from the administrator's failure to use "the care, skill, prudence, and diligence" required by ERISA section 404(a)(1)(B).

If there is such a breach, ERISA section 409 might make the fiduciary "personally liable to make good to such plan any losses to the plan resulting from each such breach[.]" A participant might assert that a tax that would not have been incurred but for the fiduciary's breach is such a loss.

Of course, whether a plan's administrator breached its standard of care is a factual inquiry.

[david rigby]

Would a plan disqualification (surely an active event, not a passive one) open the door to anything else being audited?