EPCRS Correction

[T.J. Orr]

I have a new client who came to me for PPA restatement and tossed in admn that his accountant had been doing for him. He is a PC sponsoring a profit sharing plan, with no 401(k) provision, and no employees. For the last few years he has made 401(k) elective deferrals from his S-Corp wages, and has made employer contributions up to max deduction amount each year. Would you treat the 401(k) contribution as an "excess allocation" under EPCRS and refund the deferrals back to the guy? I'd love to be able to amend retroactively under VCP, but am not sure this is a 401(a) failure that would allow me to do so. Given that he's made the 401(k) contributions over the last 4 years or so, it would be an expensive correction if I can't amend retroactively.

[Mike Preston]

Accepting the deferrals is most assuredly a qualification failure. I see no problem with filing EPCRS with a suggested correction of retroactively amending to allow the deferrals. Worst case scenario they decline your suggested correction and demand disgorging and amended tax returns. But that is what is the proper correction isn't it? You might deem such a correction expensive, but it is less expensive than audit cap which would layer a pretty hefty sanction on top of the (expensive?) correction.

I'd look for any evidence to support the retroactivity, including but not limited to a mea culpa by the accountant indicating intent to provide 401(k) feature.