The Worst Plan Ever

[Dave401k]

I have a plan that could be one of the worst plans out there and now is interested in getting into compliance.

1. They did not notify employees of their right to participate. 

We did the QNEC calculations and they were deposited. What is reported on the 5330 and which line?

2. They have not deposited the full Top Heavy contribution in 5 years. What do I need to do? Which correction program should I use.

3. We went back until 2012 to correct late 401k deposits. I was not aware of the deposits being late because they appeared to be on time. (not egregiously late and they replied no to our late deposit question every year).

All of the deposits were done and we went back and did the earnings calculation. Needless to say a 5330 was not filed for prior years. What should I suggest they do?

[justanotheradmin]

1. how long were the employees unaware? I'm not aware of an excise associated with the missed opportunity to defer (MOD). At least I haven't seen one in Rev Proc 2018-52 (or the predecessors). So no Form 5330 would be needed. 

2. Read Rev Proc 2018-52. Appendix A .02. They need to deposit it. 

3. File the Form 5330. Some practitioners have been known to file a single Form 5330 with an attachment of all the details for all of the years. It is up to you if you want to do that or not. I think Janice Wegisein mentioned in one of her webinars that she has had a decent response to that method over the years. 

[jpod]

Not bad, but I enjoyed what I think is the worst plan ever, back a while ago.  Simple ps plan with allocations based on comp.  No 401k feature.  Pooled assets.  Balance forward.  Anyway, no matter what the event, transaction or occurrence, the employer did what it felt was right or necessary without any thought whatsoever about what the plan document said, let alone qualification or ERISA rules.  A few examples which I can remember.  (1)  In a few years employer felt that certain employees did such a bang up job that he juiced up their allocations to reward them.  (2)  One employee asked if he could get his annual ps money directly rather than as a plan contribution because he needed it.  We were asked and said "absolutely not."  What we weren't asked was whether they could immediately distribute it to him from the plan after it was deposited.  Guess what they did?  (3) The owner used his account to invest solely for his account.  The pooled investments were for everyone else.  (4) 5500s?  You've got to be kidding.  They were lucky because they never filed at all since inception so they were off the grid.  Accountant smelled a rat and that's how we got involved in the first place.  We helped them do 5 years' worth under DFVCP.         

[justanotheradmin]

I agree with jpod. This is far from the worst plan ever.

One that I worked on was similar, but easily worse. Take your fact pattern, add in a surprise PBGC covered DB plan, plan document restatement errors and provisions that were designed only for the owners (never mind the business entities with all the employees!) 

There are lots more examples, I'm sure others could share their war stories too, small plans that end up with hundreds of thousands of dollars of QNECs, VCP filings, withdrawals that occur at whim, "loans" that aren't really loans, surprise real estate investments etc. 

[Kac1214]

Took over a plan from a CPA (supposedly) doing admin work so I knew it would be bad but never expected to see contributions deposited just added to the earnings and spread on prior balance.  Felt like Quincy, ME doing the forensics to get this corrected.  

[Kevin C]

Bad is relative.  When I started in this business, I worked on a plan that had a history in a class by itself.  Fortunately, all of this was well before I worked on this DB plan.  Some of the highlights were 1) people who received benefits, but never worked for the plan sponsor, 2) the plan sponsor sold it's office building to the plan and was supposed to pay rent, but never did, 3) the owner of the plan sponsor bought a radio station and when it lost its broadcast license, he sold it to the plan at an inflated price.  One of the ERISA Attorneys in the office told me he was at a meeting in DC and an IRS official was talking about a plan that did everything wrong.  Halfway through the discussion, he realized they were talking about this plan.    The consultant on this one used to say he was the only person associated with this plan for more than 10 years who hadn't been sent to jail.  And, he wasn't kidding.

[jpod]

Kevin C:  You win!

[Below Ground]

I had one where the business owners took all the money in the trust and bought a beach house for themselves.  That was back in the 80's when I was an employee, luckily.  Anyway, my employer advised that they get an ERISA Attorney and resigned from the case.  Not sure what happened next.