ROTH deferrals but no provisions in plan

[cpc0506]

We just took over a plan from another TPA. Client has been allowing ROTH deferrals but there are no Roth provisions in current AA. Client informed us that they would like us to include the ROTH change in the PPA AA, but to backdate the Roth effective date to the date they stated allowing ROTH. I am not comfortable with this. Has anyone else encountered this issue and how have you addressed it?

Also, this client has been allowing pre-tax deferral amounts less than what was stated in the AA. AA imposes a 1% minimum deferral rate, but client has ignored it. What is done in this instance? We will be taking the lower limit out going forward when plan is restated for PPA.

[david rigby]

Never cheat!

BTW, what does the plan's attorney say?

[Tom Poje]

through the generosity of my heart I am running a super special deal today. enclosed are two - that is correct - two for the price of one attachments!

A few years ago the IRS had a phone forum or something along those notes. so there are some notes (the doc file) of the phone conversation which, buried somewhere in them, refers to the situation "Just what the heck do you do if the plan put the $ in a Roth account but it should have been regular deferrals" and it refers to page 36 of the PDF file. That is as close to a possible answer as I can find, but what do you expect, when you are getting such a special as 2 for 1?

of course the big difference in your case is the person actually wanted Roth, but they weren't allowed, but still, they were impermissible contributions.

correction guidelines IRS presentation.pdf

correction guidelines IRS notes.doc

[Peter Gulia]

The facts described above suggest that the employer might have given little attention to its plan document.

Is there other evidence (beyond the acts done) that tends to show what the employer's true intent was?

[ESOP Guy]

While VCPs can be a little expensive I find that often times if you can show the intent was to allow Roth deferrals the VCP will allow the correction to be a retro amendment of the plan.

You might want to talk to an ERISA attorney that has experience with VCPs. The client might be able to get what they want with IRS blessing.

[cpc0506]

The client has told us the advisor informed them that the plan allowed ROTH. (as we have said to many advisors, 'we wouldn't and can't do your job, you shouldn't try to do ours). So the client allowed a participant to make ROTH deferrals.

[david rigby]

In this context, does "advisor" mean someone involved in the asset investments? someone who gets a higher compensation/commission/etc. when the plan assets are larger?

[cpc0506]

yes, I would say so....

[jpod]

Was there really an "operational error" here that could trigger disqualification? The error was not treating the contributions as pre-tax for W-2 reporting and income tax withholding purposes, and the correction is for the employer to file corrected

W-2s and the participants to file amended returns seeking refunds. I can argue with a straight face that the mischaracterization of the contributions as Roth in the plan's records is not a disqualifying defect and can be corrected without regard to EPCRS. With that said, however, I expect that if the employer can show that if it offered the Roth option uniformly since DATE X the IRS would be willing to bless a retroactive amendment through VCP and wouldn't get bogged down in the issue of whether this is truly an operational error or not.