2019-19 EPCRS

[austin3515]

Self correction by amendment. We meet all of ther equirements, the only "issue" is it so happens that predominantly HCE's.

The issue is Taxable Fringe Benefits were taken into account when they should not have been. We want to amend retroactively to 2018 as the corection to include TFB.

Is that a problem?  There is nothing in the new "correction by amendment" that is problematic. It references me to section 6.02 for correction principles, but it seems I can check off all those boxes too (i.e., it is consistent with general principles).

Thanks in advance!

 

[Luke Bailey]

austin3515, I agree with you that there does not appear to be anything in Rev. Proc. 2019-19 that imposes a "predominantly NHCE" or similar requirement. Seems like it should work if caught within the self-correction period.

[Belgarath]

Not sure I agree. Section 4.05(2)(a)(iii) provides that the increase in the benefit, right, or feature to participants is permitted only if among other things, it satisfies the requirements of 401(a)(4), 410(b), 411(d)(6), and 403(b)(12), as applicable in addition to the 6.02 correction principles, etc...

Seems to me that such an amendment would fail to satisfy the requirements if it benefits predominantly HCE's.

[austin3515]

Take a look at this (the bolded section). Note that this type of language is not found in the correction by amendment requirements applicable to SCP that I'm referencing above.  Instead they use the language "All eligible employees are treated the same."  Because anyone with TFB would be treated the same, everyone is treated the same. Put it anothyer way, if they wantted the corrective amendment to benefit "predominantly nonhighly compensated employees" they would have said so (as they did in the correction by amendment related to eligibility).  In fact there is an important distinction here as well.  The amendment I described above must apply to ALL employees the same, while the eligibility failure described below can be limited exlusively to those employees who were treated improperly. 

.07 Correction by Amendment. (Appendix B Section I).

(4) Early Inclusion of Otherwise Eligible Employee Failure. (a) 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. The plan is amended retroactively to change the eligibility or entry date provisions to provide for the inclusion of the ineligible employee to reflect the plan's actual operations. The amendment may change the eligibility or entry date provisions with respect to only those ineligible employees that were wrongly included, and only to those ineligible employees, provided (i) the amendment satisfies § 401(a) at the time it is adopted, (ii) the amendment would have satisfied § 401(a) had the amendment been adopted at the earlier time when it is effective, and (iii) the employees affected by the amendment are predominantly nonhighly compensated employees. For a defined benefit plan, a contribution may have to be made to the plan for a correction that is accomplished through a plan amendment if the plan is subject to the requirements of § 436(c) at the time of the amendment, as described in section 6.02(4)(e)(ii).

[Belgarath]

Would you feel the same way if it were bonuses, rather than TFB's, and it was predominantly HCE's who got the bonuses?

Perhaps I'm being overly conservative on this, but I wouldn't do what you are suggesting. However, we can certainly agree to disagree on this subject! I'm always easier to get along with on Fridays...

[austin3515]

But what portion of EPCRS are you saying is violated?  There is no "smell test" (I agree the smell test 

401(a)(4) - No, because including TFB is a safe harbor definition of como

410(b),this doesn;t affect 410b.

411(d)(6), Isn't this the cutback reference?  No cut-backs here.

and 403(b)(12),  - Not a 403b plan, so N/A.

Again, the IRS could have restricted us in that way, but they did not.

[Belgarath]

I agree that excluding TFB is a 414(s) safe harbor compensation exclusion. But I don't think that alters the premise that this amendment favors predominantly HCE's, and it seems to me that isn't allowable under 1.401(a)(4)-1(c)(2), or possibly other sections as well - I'd have to look, I dunno offhand.

Excluding elective deferrals is a 414(s) safe harbor as well - suppose all the HCE's defer 18%, and the NHCE's defer 2% on average. Is it ok to allocate the profit sharing contribution on a retroactive correction to include TFB's and elective deferrals, such that the PS allocation now substantially benefits the HCE's far more than without the retroactive amendment?

I'm just saying I wouldn't do this as SCP. Perhaps a VCP would be successful, and then no worries! But everyone else may think I'm nuts, overly cautious, or just plain wrong.

Enjoy the weekend! I expect that what passes for my brain will be going on strike before too much longer... 

 

[austin3515]

Well FWIW, I suppose the fact that I asked the question in the first place certainly suggests that I can understand your thought process.  I was getting more comfortable the more I was writing.  Anyway, curious to see if anyone else has a say, because i think it will be important to know if that is a consideration or not with this provision, which will clearly be a popular corrective tool in the shed.

[Belgarath]

Yes, I'd also like to see some other opinions. As I said, they may all agree with you. Ciao.

P.S. - somewhat terrifying if you can follow my thought process - I'm not sure that I can even follow it. It may be an indication of a deeply disturbed individual...

[JustnERPA]

Perhaps you describe the two options, SCP and VCP, to the employer. Include the pro and cons of each: costs and certainty, add your caveats, and have the employer choose.

[austin3515]

There is definitely a yay or nay answer to this question.

[Luke Bailey]

OK. Here's a possible way to harmonize both sides of issue. Treas. reg. 1.401(a)(4)-5 contains rules prohibiting a pattern of discriminatory plan amendments, determined on a facts and circumstances basis. So if austin3515's client conforms the plan doc to plan operations where plan comp definition was underinclusive of what payroll was doing, and the amendment this time benefits predominantly HCEs, then arguably that's OK under 2019-19, but has the collateral consequence that they are committed to amending in future for similar issue,  even if predominantly affects NHCEs in future instance. Otherwise, if they amend only to conform plan doc when it favors HCEs, they have a discriminatory pattern of amendments.

Of course, they may never have a similar error, but the principle applies nonetheless.