EPCRS Retro Amendment for HCE

[austin3515]

Ee is a new hire in 2016 and thus an NHCE in 2016.  Allowed into the Plan early.  Today we want to amend the Plan retroactively to allow him in.  The problem is he made $130,000 in 2016.

He would have entered 1/1/17 absent the EPCRS amendment, so the amendment would only affect the period of time that he was an NHCE.

What do you think? Can we use EPCRS SCP for the retro amendment to make him eligible in 2016?

[RatherBeGolfing]

Was it known that he would be an HCE for 2017 when he was allowed to participate in 2016?

 

[Mike Preston]

He was an NHCE for 2016.  Shouldn't be a problem.

[Tom Poje]

are there other facts and circumstances? for instance, lets say you, as an NHCE deferred early in that plan 2 years ago and your deferrals were returned, how would you feel at this time? why all of a sudden a change in policy?

I understand your concern, there is a certain 'smell' to this. Again, never in the past was a 'mistake' made in which someone was allowed to defer early and suddenly up pops a situation in which someone who is going to be an HCE was 'accidently' allowed to defer early and yet, I suppose, none of the other NHCEs in 2016 were accidently allowed to defer

might be tough to prove but...

 

of course, the chances of the plan being audited, and it being caught is another matter.

 

[austin3515]

I've always been uncomfortable with this.  I was never able to put in writing what it was, but Tom you hit the nail on the head.  I had another client ask recently (thankfully they asked first) if they could let a new executive in right away (and waive the 1 YOS requirement) because the CEO had, as part of the negotiating process, told the executive he would waive the eligibility.  I'm glad I wasn't the person charged with telling the CEO it wouldn't work, but let's say I hadn't been able to nip it in the bud.  I think Tom's point about facts and circumstances, and the fact pattern I just outlined, is clearly suggestive of a problem.

Now, interestingly, we did address with a top ERISA attorney who was comfortable recognizing service with the executives former employer based on the "He is not an HCE" argument (they opted NOT to set the precedent in the end).  But does a different standard apply to an EPCRS retro amendment?  Should the IRS issue some clarification on this point? It comes up all the time! 

[Tom Poje]

the intent of the regs is HCEs don't get favored.

the IRS sort of expressed this - I think in the proposed nondiscrim regs or maybe it was in their comments using short term employees to support a contribution...

yes, by the mathematics you can prove a plan passes, but...

............

possibly the catch in your case, the intent (at least as I see it) under EPCRS, tis amendment rule is for  a person who was inadvertently permitted to defer

no, this sounds like a case in which a person was allowed to defer despite the knowledge he didn't meet eligibility, and "we can get away with it" because at the time such person was not 'technically' an HCE.

part of EPCRS is procedures are in place to prevent such errors from occurring - how come this problem never happened before but for some reason when a person filling an executive position the procedure 'fell through the cracks"

......................

(but then you have to remember, at Christmas time I am a Grinch, and it clearly carries over to other times...)

 

[MoJo]

30 minutes ago, austin3515 said:

...(they opted NOT to set the precedent in the end)...

I actually was allowed to enter a plan early - by mistake - and my employer was a TPA (and as it turns out, not necessarily a "good one.")  The issue - as you point out, Austin, is the PRECEDENT.  If an employer had previously NOT allowed in those inadvertently allowed to participate and refunded money, and then allowed one who "technically" was an NHCE but would be an HCE going forward, I would think an auditor/investigator might ask questions.  It may be (and I believe it is) "technically" ok to do this, but do you want to set the precedent - or have been inconsistent.

In my experience, "inconsistent" is harder to explain than "oops."

[CuseFan]

i think if a plan is amended in a current year to allow early entry (or recognize prior employer service) that is fine, but agree with everyone's comments that a retroactive amendment to accommodate a current HCE who was an NHCE when the amendment is retroactively effective doesn't pass the smell test. While we're at it, let's give him/her a 20% profit sharing based on that first year NHCE compensation - they weren't high paid then.