Automatic Enrollment

[John Feldt ERPA CPC QPA]

A draft document was prepared for review/discussion last fall. This draft document contained a 3% default deferral. Upon final discussion, the client chose to use a 4% default deferral for automatic enrollment starting January 1, 2016.

The materials provided to the participants from the investment provider all explained how a 4% deferral would begin if no contrary election was made.

However, the plan document that was executed still had a 3% default deferral instead of 4%. It is a calendar year plan. The issue was just now noticed.

The question is: Does this necessitate a VCP application to properly fix, or is possible to adopt the 4% in an amendment now, retroactively effective January 1, 2016, as long as it is adopted before the last day of this plan year?

[ErisaGeek]

I do not find it necessary to make a VCP submission in this case since all the communication was done accurately to plan participants. The participants were not affected by any means. It was simply an oversight of making the change in the plan document. I would simply retroactively fix it in this case even though usually retroactive amendments is not something personally I prefer doing but I don't see any harm in this particular scenario.

[Peter Gulia]

Was "the plan document" signed before or after the plan's administrator sent the notice?

Does anything in "the plan document" treat the notice as incorporated by reference or otherwise made a part of the terms of the plan?

Consider that what you think of as "the" plan might not be the only one of possibly several "documents and instruments governing the plan[.]" ERISA section 404(a)(1)(D).

[GMK]

Presumably, the SPD does not list a 3% default deferral election either. (Just thinking about what might affect participant deferral decisions.)

[John Feldt ERPA CPC QPA]

Was "the plan document" signed before or after the plan's administrator sent the notice?
Before.

Does anything in "the plan document" treat the notice as incorporated by reference or otherwise made a part of the terms of the plan?
No.

Consider that what you think of as "the" plan might not be the only one of possibly several "documents and instruments governing the plan[.]" ERISA section 404(a)(1)(D).
Not overly concerned about how the DOL views it, more concerned about the IRS - keeping the plan's tax-qualified status.

Presumably, the SPD does not list a 3% default deferral election either. (Just thinking about what might affect participant deferral decisions.)
SPD shows 3%

What does Revenue Procedure 2007-44 actually allow, amendment-wise? Section 15, example 2:
Example 2: ...On July 1, 2010, Employer M starts to operate the plan in a manner which is inconsistent with the written plan document but an amendment to reflect the plan change when made retroactively effective would not violate § 411(d)(6). This change is unrelated to a change in qualification requirement or published guidance. To conform the plan document with the plan’s operation, Employer M adopts an amendment by December 31, 2010 that reflects the change in operation and such amendment is adopted in good faith with the intent of maintaining the qualified status of Plan X.... The amendment would be retroactively effective as of July 1, 2010 and Employer M must correct its operation to the extent necessary to reflect the corrective amendment.

[Peter Gulia]

I assumed you were thinking of tax disqualification, and not worrying about the Labor department's or a participant's enforcement of ERISA.

Rather, I mentioned the ERISA provision because some facts might support a tax-law argument that the in-operation administration of the plan was consistent with the plan's terms because the written plan was more than only one writing.

Another try: After one considers the base plan's provisions about what the sponsor must or may do to amend the plan, is there an argument that the notice (4%) was a plan amendment?

[John Feldt ERPA CPC QPA]

Okay, I see your point, just not certain how the IRS would view that.

[Peter Gulia]

If it gets to examination, a typical IRS examiner won't like arguments of the kind I described above.

But the ideas can help in a few ways:

If an employer won't do a correction, a lawyer's memo might help the employer take tax-return reporting positions assuming the plan remains tax-qualified.

If something is examined, reliance on the lawyer's memo might support a defense that the employer did not knowingly or recklessly file a false tax return.

Even if the IRS's examiner and her supervisor don't like the story, it might be enough that the difficulties, expenses, and hazards of a dispute motive a supervisor to close the situation with a negotiated sanction smaller than what otherwise might have been.

Of course, it helps if the facts are better than those you described.