correcting error in plan doc when switching TPA

[parks777]

In mid-2015, we switched to a new TPA and therefore adopted new plan docs.  In the process, the wrong box (Pro-Rata Formula) was checked for our Employer Profit Sharing Contributions rather than the Integrated Formula that had always been used.  We actually calculated the 2015 proift sharing allocation using the integrated method.  This plan doc error was only discovered in the last week while researching another process error. 

I have a few questions about how to correct, but don't know what is allowed:

1. Can we make a retroactive plan amendment to correct the method and leave the 2015 calculation alone? (What provisions/regs apply to retroactive amendments?)

2. If not, I assume the only alternative is to go back and use the pro-rata approach for 2015?

3. If we execute an amendment immediately (January 2017), do we still have to follow the existing plan doc for the 2016 contribution that has not yet been calculated?

I don't know if it sets any precedent for administering according to the plan doc even when errors were discovered, but we corrected another similar error found in mid-2016 regarding last-day requirement for PS eligibility, and in that case we did make a contribution for the employee who left mid-year.

Thanks for your assistance.

[ETA Consulting LLC]

These are correctable.  What is your TPA saying?

[parks777]

1 hour ago, ETA Consulting LLC said:

These are correctable.  What is your TPA saying?

Correctable through retroactive amendment or through correcting the allocations?

I'm trying to get our ducks in a row before approaching the TPA so I know what the options are and can understand what is possible.

 

[MWeddell]

Assuming that communications to the employees consistently describe the integrated allocation formula, the IRS may approve a retroactive amendment to put the integrated allocation formula back in place.  However, you'll have to incur the time and expense of a VCP filing.  The Self-Correction Program doesn't allow you to make this amendment on your own.

[BG5150]

We have, from time to time, done a "scrivener's error" amendment if it was something a simple as one of the plan terms recorded incorrectly from one plan version to another.

 

For 2015 what were the PS allocation requirements before the amendment?  Had anyone successfully satisfied those requirements?  If so, I don't think you could've changed the allocation method, even by mistake.

[MWeddell]

If an employer wants to reform its plan document without a VCP filing, claiming that it was a scriviner's error, then I suggest the employer should consult with its legal counsel.

[parks777]

27 minutes ago, BG5150 said:

For 2015 what were the PS allocation requirements before the amendment? 

As previously stated, we have had three plan documents since inception for this plan.  The original document was signed in 1993 and had the following option checked:

"Integration with Social Security. The Employer Contributions for a Plan Year shall be allocated to the accounts of Participants eligible to share in Employer Contributions for the Plan Year in accordance with the procedures for Social Security integration set forth in the Plan.  The Plan's Integration Level shall be equal to the Social Security Taxable Wage Base."

Our second plan document was signed into effect in May 2010 and had the following option selected:

"Base Integrated Contribution Formula: The Employer's contribution shall be allocated as an amount taking into consideration amounts contributed to Social Security using the two-step Base Integrated Allocation Formula as described in the Basic Plan Document."

When we switched to our current TPA (effective 9/2015), our intent was to keep all provisions of the plan the same, but the following box was mistakenly checked:

"Pro-Rata Formula: Employer Profit Sharing Contributions will be allocated to the Individual Accounts of Qualifying Participants in the ratio that each Qualifying Participant's Compensation for the Plan Year bears to the total Compensation of all Qualifying Participants for the Plan Year."

Not realizing the error, we calculated the 2015 allocation based on the two-tier integrated formula in continuation of our longstanding process.

29 minutes ago, BG5150 said:

Had anyone successfully satisfied those requirements?  If so, I don't think you could've changed the allocation method, even by mistake.

I'm not sure what you are asking here.  What do you mean by "satisfied those requirements"?

30 minutes ago, BG5150 said:

We have, from time to time, done a "scrivener's error" amendment if it was something a simple as one of the plan terms recorded incorrectly from one plan version to another.

 

16 minutes ago, MWeddell said:

If an employer wants to reform its plan document without a VCP filing, claiming that it was a scriviner's error, then I suggest the employer should consult with its legal counsel.

This seems to be a classic case of a scrivener's error to my non-lawyer's mind, but will definitely take your caution to heart.

 

[MWeddell]

5 minutes ago, parks777 said:

This seems to be a classic case of a scrivener's error to my non-lawyer's mind, but will definitely take your caution to heart.

 

If you want to be more specific other than "check with legal counsel," you could point out "1) It clearly is not authorized by the IRS' Self-Correction Program and 2) according to the ERISA Outline Book, the 7th circuit court of appeals in a case involving Verizon "noted that the power to recognize and correct a scrivener’s error in an ERISA plan rests exclusively with the courts, and an administrator cannot simply reform a plan to correct what it unilaterally perceives to be a mistake or error contained in the plan’s written terms."  Also, in my recollection, courts generally interpret the scrivener's error doctrine more narrowly than benefits consultants tend to do.  Hence, my caution.

[parks777]

Thanks for that clarification.

Any thoughts on whether an amendment executed after 12/31/2016 but before the 2016 contribution is calculated or paid can be used to impact our 2016 contribution?

[MWeddell]

In general, a discretionary plan amendment must be executed by the last day of the plan year in which it becomes effective, according to IRS guidance.

[Bill Presson]

You had a signed document in 1993 and didn't have another until 2010?

I'm wondering if there were a couple of missed restatement cycles in there.

[BG5150]

17 hours ago, parks777 said:

As previously stated, we have had three plan documents since inception for this plan.  The original document was signed in 1993 and had the following option checked:

"Integration with Social Security. The Employer Contributions for a Plan Year shall be allocated to the accounts of Participants eligible to share in Employer Contributions for the Plan Year in accordance with the procedures for Social Security integration set forth in the Plan.  The Plan's Integration Level shall be equal to the Social Security Taxable Wage Base."

 

 

My post asked, "what were the PS allocation requirements"?  Not the allocation method.

You said the amendment was made mid-year.  If one participant earned the right to a PS under the allocation requirements, you cannot change the method.  So, scriveners error or not, if anyone satisfied the allocation requirements, the method for the year is locked in. At least for '15.

 

(If there was an EOY condition, then you are out of luck)