401k question: did not include Bonus in deferral

[Victor]

Hi Everyone,

I know this question has been asked a million times already, but I owe my due diligence to my employer to ask this question again in order to make sure that there's no way around this.  Please bear with me.

I am an administrator for our 401k plan which existed since 1999, and this entire time, our plan doc has allow all W-2 compensations which included bonus; however, our general unwritten policy has always been to exclude bonus from deferral.  All 18 years, we have never deferred any compensation related to bonus and now our auditor has recommended a SCP to correct this.  I've looked through the adoption agreement, asked our 401k vendor and confirmed that our plan indeed never excluded bonus. 

This is a new auditor and it's hard to believe that the previous auditors have missed this the entire time.  The recommendation is to do recalculate the missed deferrals for at least the last 3 years.  Is there a way to correct this without doing a SCP which includes QNEC from the employer of over 40-50k?

I am not sure it's helpful to know but we've always executed bonus payment in a separate payroll from our regular payroll schedule.

Thank you,

[ESOP Guy]

I have my doubts this can be done via self correction ever.  I forget the exact wording but I thought to use self correction the error couldn't be recurring like this. 

If they don't want to make a QNEC the only way I can think of is hire an attorney and file a VCP.  My experience is if you can show that for decades the plan was run one way that was legal but just not how the plan was written the IRS will allow a retro amendment.  A good ERISA attorney that has experience with VCPs can give a better idea of chance of success. 

I know this is a fair amount of legal expense but it will be a lot less then $40-50k. 

I just don't see a fix that doesn't go the route of a VCP however. 

[Belgarath]

First, I tend to agree with ESOP - this has VCP written all over it. SCP is available forever for "insignificant" errors, but this one covers everyone in the plan and occurs for many, many years, so it would be "significant" and therefore you are well beyond the SCP correction period for "significant" errors.

However, first check your plan language carefully - it may permit, in the "boilerplate" language or language specific to deferrals, the Plan Administrator to (presumably on a uniform and nondiscriminatory basis)  exclude certain compensation, etc. - certainly worth a look - documents sometimes have some very interesting provisions.

What does the Summary Plan Description say? What do the deferral election forms say? If everything says, in essence, "W2" and doesn't leave any wiggle room, I think you are stuck with VCP, although as ESOP suggests, possible that you can get a VCP filing approved where retro amendment conforms to actual operations. Otherwise,  I also don't think that just correcting for just the last three years will generally be acceptable to the IRS, but the great thing about VCP is you can ASK for anything. Just be prepared to have it rejected. You can also try a "John Doe" submission, but your attorney can advise you.

Going to be a lot of work and expense, even under the best od circumstances, if you have to submit to the IRS. Good luck!

[bzorc]

Are bonuses subject to a "special election"? Might have a bearing on this...

[DMcGovern]

Were the employees (participants) told there wouldn't be deferral deductions from bonuses?  If so, was it done consistently (such as at enrollment meetings)?

Anyone given the opportunity to make an election on bonuses (or told they could not)?

[JJRetirement]

I would also consider the impact of bonuses over time before counting SCP out.  Are bonuses given every year or are they more infrequent?  If they are pretty much part of compensation each year, I agree that SCP doesn't seem appropriate here.  

And I have serious doubts about getting approval for a retro amendment where participants get less than the plan's written terms specified - unless the all or most of those affected are HCE.  

[Victor]

Thank you for the great comments, this is much better than searching through old posts!  I think we better consult with a ERISA attorney to further proceed with this.  This seems much bigger than I thought.  I don't see it going in any other way neither.  After all, IRS would definitely want to favor employees regardless how policy is set without anything written in a piece of paper.

[Flyboyjohn]

I think an anonymous VCP filling proposing a retroactive amendment/document correction is worth a shot under these circumstances. We've been pleasantly surprised at what IRS will permit in the way of retroactive amendments.