Plan doesn't allow Roth, but Participants made Roth Deferrals

[Danny CPA]

Hello,

I am looking for a little guidance (I believe the answer will be VCP, but wanted to be sure that nobody has a different idea).

We took over a plan, and 2016 is the first year we are doing the administration. Several participants made Roth Deferrals, but the PPA Restatement effective 1/1/2016 does not allow Roth contributions. Upon further questioning, there have been Roth Deferrals for years (the prior EGTRRA Restatement did not allow Roth contributions either).

The bulk of the Roth money is actually from the sole owner, but other participants have Roth money within the plan. The prior administrator kept track of all of these as regular pre-tax deferrals (they never requested or saw the W-2s).

Again, I think I know the answer, but can we self correct this in any way, or is VCP our only answer? Will they allow us to do a retroactive amendment to the plan to allow for Roth contributions?

Thank you

[Tom Poje]

if you were to 'self-correct', that would mean following the terms of the document, which means moving the $ from Roth to regular deferral, but that involves tax issues so would require VCP

so the other option would be retro amend the plan to permit Roth, but you can't really self- correct something like that without IRS approval, so again going through VCP. I would suspect the IRS would permit that, especially if the deferral election form indicated either deferrals or Roth (as opposed to 'only the owner did this')

at least that is my understanding.

[david rigby]

The plan sponsor (separate from the TPA) needs an ERISA counsel.

 

[Danny CPA]

Thank you all. I figured that would be the case. We will discuss with the plan sponsor.

[austin3515]

TPA needs to make sure their malpractice policy is up to date .

 

Out of curiosity, take a look at the document before the PPA restatement. Sometimes TPA's switch document providers and as a result the conversion process is hyper-manual and therefore prone to error (such as the error of failing to check the box permitting Roth 401k).  That's not a correction, but should make the VCP a slam dunk.

[RatherBeGolfing]

1 hour ago, austin3515 said:

and as a result the conversion process is hyper-manual and therefore prone to error

or it is not treated as hyper manual because of mapping and then the doo-doo hits the fan down the road

Shouldn't be an issue to get it through VCP with or without an earlier document that allowed Roth, it just isn't something you can self correct.

[austin3515]

Quote

or it is not treated as hyper manual because of mapping and then the doo-doo hits the fan down the road

I have to tell you I was blown away at how beautifully the mapping worked by Corbel.  We checked, believe me (and I know that was your point, that not everyone checks), but it simply never happened where something like this was an issue during this process.  I often quote Reagan - "trust, but verify."

Now I saw another provider who switched documents during PPA who for example did not exclude HCE's from the Safe Harbor Match.  Talk about the doo-doo hitting the fan...  Btu also a great example of what I mean. It simply never would have happened without switching document providers--the two are inextricably linked.

[Belgarath]

Our mapping process was not quite as smooth as yours, but we had (for reasons unknown, I wasn't here at the time) mostly VS - NOT in AA format, and the mapping over to the new VS in AA format wasn't perfect by any means. When mapping from a prototype, it was pretty smooth. I have, however, blessedly put all of that pretty much out of my mind. Now I just have to worry about restating 403(b)'s. While it will be a relief to get them all onto a consistent document that is IRS approved, the restatement itself is likely to be a little funky, what with all the retroactive dates and specific designations of responsibilities, etc., etc., etc... The ERISA ones are ok, but the non-ERISA school system plans often have substantial wackiness in some of the provisions.

 

[austin3515]

Did you already get your opinion letter? Still waiting on mine...

[Belgarath]

Me too. I think they were expected the end of this week. But it'll be soon, regardless. I think I've got around 80 of them to restate, although some always drop off when you quote them a restatement fee.

[stayingbusy]

@Danny CPA bringing this back up a couple of years later...did you proceed with the VCP or were you able to self-correct?  Working with a similar situation and also hoping that the plan may be able to self-correct. Thanks! 

[duckthing]

@stayingbusy, as you wait to hear back, it's worth checking out Notice 2023-43. There have been some changes to EPCRS since this thread was posted and the plan may have options today that weren't available when this thread was posted.