Unrelated Participating Employer - No Participation Agreement

[LANDO]

One of our sponsors acquired interests in a couple of companies late in 2014 and decided to bring the employees of their newly related entities into their 401(k) plan effective as of 1/1/2015. Unfortunately, they neglected to tell us, so no participation agreements were executed. Now here we are in late October 2015.

To complicate things, one of the participating employers isn't part of a controlled or affiliated service group with the sponsor, so they also created a multiple employer plan. Obviously we have document and/or operational issues here.

The way I see it there are two alternatives:

1) Correct the operational errors using SCP, although I haven't thought about what that would mean or if it would even be possible under SCP, but I'm sure nobody would like this result, or

2) Retroactively restate the plan effective as of 1/1/2015 onto our VS document, incorporate multiple employer provisions, and include participation agreements for the participating employers. Then file under VCP.

I have no doubt the IRS would issue a compliance statement on these facts, but I'm looking for a way to avoid the costs of a filing for this sponsor without jeopardizing the qualified status of their plan, but I'm not seeing it!

Anyone????

[Lou S.]

I'm not 100% sure but I think this is eligible under self correction via your plan amendment proposed in option 2.

It seems to fall under several items the IRS lists as available for self corrections -

1. as a result of a corporate transactions

2. expanding coverage to an otherwise ineligible group of employees.

But it is sometimes risky to do self-correction when it is something that can clearly be fixed with VCP using your option 2.

Just galls you to pay for VCP if you can fix via SCP.

[Peter Gulia]

Before one assumes that SCP is less expensive than VCP, estimate the expense for the professional time needed to research and write tax advice at an appropriate confidence level.

The remaining difference might be small enough that a client might prefer the certainty of a correction statement.

[LANDO]

Thanks Lou.

I think expanding coverage with a retroactive amendment is only available where an otherwise eligible employee has not met the plan's age or service requirement, or simply entered the plan before their entry date. [Early Inclusion of Otherwise Eligible Employee Failure, Rev Proc 2013-12, Appendix B, Section 2.07(3)] In this case it would hard to make the arguement that the employees of an unrelated employer, or even a related employer, were otherwise eligible employees when the document defines "Eligible Employee" to inlcude only employees of the plan sponsor or other employers that have adopted the Plan.

The only thing I'm seeing in Rev Proc 2013-12 relating to corporated mergers/acquisitions is related to "Transferred Assets" [section 5.01(7)], which doesn't fit my situation.

As far as option #1 above, I was thinking putting the plan back into the same position it would have been had the operational error not occurred...as in, treating the ineligible contributions as mistaken employer contributions, and then having the employer make their employees whole outside the plan (i.e. adjust payroll,withholdings, W2 information, etc...very ugly!)

[david rigby]

To complicate things, one of the participating employers isn't part of a controlled or affiliated service group with the sponsor, so they also created a multiple employer plan.

Pardon my ignorance: if they did not execute participation agreements for the "new companies", how is there a multiple-employer plan?

[LANDO]

Excellent point Peter. I will incorporate that reasoning into my repertoire.

The pressure always comes in trying to make sponsors and sales folks understand the gravity of the situation. Many sponsors would prefer to retroactively amend and call it a day...no filing. Same old story, low probability of the problem ever being caught, but high (or at least higher) consequences if it is, but there are always those risk takers.

Unfortunately, we act as a fiduciary on most of our plans, and my concern in not following IRS guidance with these corrections is that we would get sucked into sharing in CAP correction costs as a co-fiduciary if we allow sponsors to take shortcuts.

[LANDO]

David that sounds like a bit of a trick question, but maybe you're being sincere.

I guess technically it wouldn't be a multiple employer plan unless the plan were amended to be a multiple employer plan. Right now it's just a single employer plan with an operational defect because they have allowed an unrelated employer to participate in their plan without a participation agreement and the plan document does not accommodate multiple employer plan provisions.

One of the ways I proposed to correct the operational defect was to retroactively amend the single employer plan to be a multiple employer plan to accommodate the unrelated participating employer.

[QDROphile]

Consider that covering the new entities is a plan amendment effective January 1, 2015 and there is time to adopt that amendment yet in 2015 under the standard timing rule.

[LANDO]

I have considered that, but is this an amendment that can be retroactive to the first day of the plan year? If there is any authority for that I'd be all ears!

[LANDO]

Let me put that a different way...I would LOVE to get my head around that approach. I wouldn't think this is the type of amendment that could be made retroactive, even to the beginning of the current plan year. Generally, retroactive amendments are allowed in only narrow circumstances...do you feel a supportable arguement can be made that a correction like this is one of them? And if so, how do I get there?

[QDROphile]

Treas. Reg. section 1.401(b)-1. Revenue procedures from 2007 on have discussed the regulation in a helpful way. You have to look out for the special 401(k) rules relating to when a deferral election can be effective, and that might put you off.

[Lou S.]

Consider that covering the new entities is a plan amendment effective January 1, 2015 and there is time to adopt that amendment yet in 2015 under the standard timing rule.

I think the problem Lando keeps running into is the Plan accepting deferrals for employees of unrelated companies who are not participants of the Plan prior to them executing an amendment making them an adopting employer and what the proper fix is.

And it seems to come back to, can it be corrected by amendment under SCP or does it need to be corrected by amendment under VCP given his set of facts?

[LANDO]

Thank you QDROphile. I will look at the Regulation and see what Rev Procs I can dig up. That said, I guess I'm still not clear what you're saying. So are you saying you'd have a good comfort level with retroactively amending and not filing, or are you saying I may be able to find some support for not filing?

Generally, I take a pretty conservative approach to corrections and I'm just trying to get a feel for how others view this scenario.

[QDROphile]

If you want certainty you are going to have to go the VCP route. That should not be any problem. The IRS allows retroactive amendment of failure to adopt all the time.

If you want certainty, you have a new thing to worry about. Multiple employer 401(k) plans have an issue with the securities registration exemption that covers single employer plans and plans without elective contributions. I think that if the participating employers have material common ownership, although not at a level that allows a single employer plan, the exemption applies. But we have no authority that gives a definitive answer. And no one seems to care.

[LANDO]

Yes, there is significant common ownership, but not enough to make it a CG.

Well, if no one cares...I'm jumping on that bus!