HCE Waiver of Self Correction Funds

[PensionPete]

We have a client for whom we are doing a self-correction.  Salary deferrals were not deducted from bonus wages per terms of the Plan plus the applicable matching contributions.  However, an HCE doesn't want to be part of the correction - wants to waive any funds he is otherwise due under the correction measure. 

The question is (1) can we allow this ....have him sign a waiver?  and (2) would this put the Plan in a worse position upon audit for not correcting the failure in full and in accordance with IRS Guidelines.  Is there even a waiver option discussed in the IRS guidelines on correction?  Any thoughts are welcome.

[C. B. Zeller]

One of the guiding principles of the correction program is to put the plan in the position it would have otherwise been in had the failure not occurred. If his election was in place at the time that the failure occurred, then the employer is obligated to honor that election. There is no basis for allowing him to retroactively waive his election merely because the correction is being done now.

Another way to think about it is that the correction is simply fixing an operational defect in the plan. It is not some benefit or right that is available to individual participants. Therefore there is nothing to waive because the correction is not adding anything new to the plan.

[Luke Bailey]

I doubt you could get the IRS to agree to that even in VCP, though you could try. If self-correction, then violates too many rules (e.g., the CODA rules for a one-time irrevocable election) to be worth considering.

[PensionPete]

Thanks guys for the replies. This follows my line of thinking as well. 

And Luke - we are aware of at least one case where the IRS accepted an HCE waiver - and it was a VCP filing.  Not sure if fact pattern matched our case perfectly, but same idea.  But our situation isn't really worth the cost of the VCP filing.

[Luke Bailey]

On ‎7‎/‎3‎/‎2019 at 9:32 PM, PensionPete said:

Thanks guys for the replies. This follows my line of thinking as well. 

And Luke - we are aware of at least one case where the IRS accepted an HCE waiver - and it was a VCP filing.  Not sure if fact pattern matched our case perfectly, but same idea.  But our situation isn't really worth the cost of the VCP filing. 

Good to know, PensionPete. Thanks.

[John McMorrow]

I submitted a vcp filing where this issue was squarely put before the IRS.  The IRS position was to the effect that it would not bless HCE waivers of missed contributions.  Policy consideration:  The employer/employee relationship is not horizontal.  Bottom line: it is unseemly for an employer to even ask an employee to sign such a waiver.   

[Luke Bailey]

John, your experience is different from PensionPete's. I suspect that in PensionPete's case  the HCE owned all or a very significant percentage of the company.

[PensionPete]

Actually, in our situation, the HCE was not an owner, but had negotiated his employment wages/contract w/parent company and felt the windfall he would receive (which made up a considerable portion of the total correction amount) might violate that agreement in "spirit" and was willing to forego the funds.  Yes, i know, a surprise.