Excluded Class employee allowed to participate in plan

[401kQ's]

If a member of an excluded class was allowed to participate in the plan, do you need to retroactively amend the plan to allow for their participation and then file through VCP or can you just amend as part of SCP?

[Madison71]

My recollection is it’s one of the the few times where it is possible to self correct by retroactively amending without filing VCP.  

[BG5150]

Was this person an HCE at the time?

[401kQ's]

No they are not an HCE.  The plan excludes hourly employees and they allowed her to participate even though she was hourly.  I know that you can self correct and do a retro-active amendment when an employee who has not met the plans eligibility requirements was allowed to participate but I am not finding much guidance on members of excluded classes being allowed to participate.

[John Feldt ERPA CPC QPA]

From Rev Proc 2016-51: Plan Amendment Correction Method. The Operational Failure of including an otherwise eligible employee in the plan who either (i) has not completed the plan’s minimum age or service requirements, or (ii) has completed the plan’s minimum age or service requirements but became a participant in the plan on a date earlier than the applicable plan entry date, may be corrected by using the plan amendment correction method set forth in this paragraph.

Depending on the IRS agent that audits the plan, you could have an issue. Some agents are very strict about this and say that the language above is very specific about age or service or entry dates, and is not applicable to correcting an excluded class.

Perhaps the employer should think that over and consider the option to refund the deferrals and placing any ER allocations in a suspense account?

[BG5150]

I would argue (ii) applies.  They were allowed to participate before the applicable plan entry date.

[John Feldt ERPA CPC QPA]

Yes, and if the IRS agent's manager disagrees (only Eligible Employees can have an entry date), you just negotiate the smallest possible sanction under audit cap.

[401kQ's]

Thanks for your responses!