Allowed Early Entry into 401k Plan

[preErisa]

The Plan was amended in mid-2015 to allow one employee to enter the Plan early. The employee was described as a newly employed employee and not a Highly -Compensated Employee. Now in 2016 it is discovered the new employee is a spouse of a Key Employee (they have different last names).. We need to correct as the new employee made 401k and received matching contributions during 2015. I believe this is a Demographic Failure requiring VCP, not SCP. Has anyone had a similar problem?

[My 2 cents]

Pardon the attitude (and some of the following may be wrong, since I do not work on 401(k) plans), but...

As if they would just amend the plan to let some nobody in early!

If the newly employed employee was described as not an HCE, was it mere ignorance or an outright lie?

Wouldn't it be more correct to say "the new employee is the spouse of a Key Employee" than "the new employee is a spouse of a Key Employee"? Even Key Employees are only entitled to one spouse at a time.

May one presume that the Key Employee in question is also an HCE? If not an HCE, then the spouse would also not be an HCE, and there would have been no violation. And did the amendment state that it does not apply to HCEs?

If the spouse was not eligible to enter by the terms of the amendment, the spouse should be given back his or her salary reduction amounts, and the matching contributions (no ifs, ands, or buts) completely forfeited. The 2015 W-2 (which is unlikely to have been issued yet) should reflect the correct figures for taxable income. If that is all done, why would there be a reportable failure?

[Lou S.]

I'm assume (and this could be a bad assumption) that the Key is Key by virtue of owning more than 5% of the and thus an HCE and that the spouse by attribution is also Key & HCE.

I'm also guessing that this spouse was the only participant allowed in early but that there other similarly situated employees who were not allowed in.

Are these correct assumptions on my part?

[preErisa]

Reply to Lou S - Yes Key is 10% owner. Yes the spouse was only one allowed in early.

[austin3515]

You've got yourself a big problem then. You're amendment benefitted a discriminatory group. The correction is to amend to bring in enough people to correct the violation, and I believe make a QNEC for each of them equal to the ADP for the NHCE's, or something like that.

To My 2 Cents original question - you would presumably be in a little hot-water if you did not ask the right question here. I'm not being critical, I assume you asked what I would have asked, which is "is this employee expected to earn more than $115,000 a year" and they said "no" and you said fine. I would like to THINK I would have asked enough questions to ferret out the truth, but I would prefer not to speculate. As to the "outright lie" accusation, I would categorize as it as gross case of omitting the whole truth for them not to say "we want to do it because it's the owner's wife." But then clients tend to exercise their pointer fingers whenever corrections involve writing checks....

[Tom Poje]

reminds me of one of the first plans I ever worked on.

looking at the data that had come in, there was misc pmts of $3 here 5$ there etc varying from month to month.

so I called the client and asked and the response was those were loan pmts, and after a few more questions the response was, well, they pay back whatever they want whenever. I at least knew enough to tell them you can't do that, you are supposed to have level pmts. then the lady says, let me get my husband. this was a bit of a shock since there was nothing on the census to indicate such, and when asked, she said "I kept my last name"

at this point, I knew it was way over my head. this was back in the days of family aggregation and both of them had big comps so the allocation was really screwed up. plus they both took loans which was also a violation for owners at the time. I simply said, let me get a hold of the actuary because this is beyond me. Not sure what took place in that conversation, but a few weeks later there was a note indicating they decided to find someone else to run their plan.

sometimes you simply never know, the forms you send out can ask the right questions, but if the client is, well, I'll leave it at that. Not sure about the TPA who 'agreed' to run their plan either.

[preErisa]

Thanks All - client will make amends with the QNEC.

Just as Tom Poje thought, we only asked the compensation question and not the family relationship question. Room for improvement!

[austin3515]

Hey, I said it first!

[ESOP Guy]

Did anyone hear something? At times I think I hear austin3515 but then I realize it is Tom Poje!

[austin3515]

Well, I think that might be the nicest professional compliment I have ever received!