Company Merger but More Generous Match was not provided for in the Updated Plan

[Bob the Swimmer]

Sorry about the length in advance !

Plan A for Company A:  At the end of 2019 this plan matched 100% of 3.5% contributed –and was merged into Plan B.  This plan had a 2-Year Cliff Vesting program for company match dollars (0/100%).  In addition, this plan has the same automatic enrollment features (e.g., start at 3% and increase 1% each year until 6% is achieved) as Plan B.

Plan B for Company B:  At the end of 2019 this plan matched 100% of the first 1% and then 50% of the next 5%.  This plan had a 2-Year Cliff Vesting program for company match dollars (0/100%). In addition, this plan has the same automatic enrollment features (e.g., start at 3% and increase 1% each year until 6% is achieved) as Plan A.

Effective 1/1/2020, the two companies merged to become Company AB.  Effective 1/1/2020, all employee contributions were INTENDED to be matched at 100% of the first 3.5% contributed, the more generous formula.  Their intent was to transfer the money from A to B in the first quarter of 2020, but COVID happened and they delayed until the market settled down; that transfer was initiated in the Fall of 2020 and has been completed.  Now, Plan B has 100% of the money for Company AB.

However, the new Plan amendments never provided for the more generous standard----100% of the first 3.5% match. Nevertheless, all company B employees received the more generous match even though the new plan did not provide for it while it was being contributed. 

Question is can we amend the plan now under SCP to provide retroactively for the more generous match that company A and B employees both got, or must we go under VCP ?

Section 4.05 (in the SCP section) in Rev. Proc. 2019-19 says the following:

No employees were disadvantaged. In fact, former B employees benefited by the higher match—the plan just did not properly provide for it at the time. It’s also well within the 2-year period for SCP.  What do you think ?

[Mike Preston]

Just amend. No SCP required.

[Bob the Swimmer]

Mike---

 

Thanks for the quick response--Very respectfully....Are you sure ? Because a whole year plus 4 months

has passed without the proper matching formula provided for by the new plan.

 

Thanks--

[Mike Preston]

Thought you were dealing with calendar year 2021 failure, only.  With 2020 thrown in, yes, SCP.  And in answer to your question: no need for VCP. 

HOWEVER, I'm not convinced the documenation is inconsistent with plan operation. Clearly there was some legal document signed before 1/1/2020 establishing the conjoining of A and B. Such a resolution that includes reference to a surviving match provision may be all you need.  

[Luke Bailey]

1 hour ago, Mike Preston said:

HOWEVER, I'm not convinced the documenation is inconsistent with plan operation. Clearly there was some legal document signed before 1/1/2020 establishing the conjoining of A and B. Such a resolution that includes reference to a surviving match provision may be all you need.  

Bob the Swimmer, Mike's point here is a good one. Make sure to check.

As to whether or not you qualify for SCP for 2020, I'd be interested to hear Mike flesh out his thinking on that. What does it mean for the "increase in the benefit" to "apply to all employees eligible to participate in the plan." Arguably, only the B employees are getting the increase, since the A already had it. On the other hand, both the A and B employees are getting the 3.5% benefit, which is what was increased for the B group. I think you could make the argument either way at a purely intellectual level based on the wording, but sometimes it's good to be practical. It seems like every EPCRS Rev. Proc. has these sorts of issues. Hard to make everything 100% clear in this complex area.

[Bob the Swimmer]

Luke and Mike, thanks for your good thoughts. Problem is the amendment document covering the merger several months before inexplicably does not mention the match. In fact, that's why the remaining vendor who was used to the higher match applied it to the entire group. The increase in the benefit language could be problematic---but given the history of EPCRS, no one is disadvantaged here, only advantaged (the B employees). On the other hand, the plan document does not reflect what happened for 16 months operationally. (Perhaps, we could check the nondiscrimination benefit testing under 401(a)(4) for B HCEs versus B NHCEs.) Any other thoughts ?  Thanks.

[EBECatty]

12 hours ago, Luke Bailey said:

What does it mean for the "increase in the benefit" to "apply to all employees eligible to participate in the plan." Arguably, only the B employees are getting the increase, since the A already had it. On the other hand, both the A and B employees are getting the 3.5% benefit, which is what was increased for the B group.

For what it's worth, shortly after this version of EPCRS was issued, I had conversations with several senior IRS folks at a conference on this issue. Their opinion, which I assume still holds, is that this language requires an increase in benefits for every participant in the plan, not just those affected by the correction. 

I was dealing with a situation in which a plan allowed loans on terms more generous than permitted by the loan policy. I proposed a retroactive amendment to the loan policy to confirm the more generous terms that were being applied in practice. I was told this would not work because it did not increase the benefits for every participant in the plan, only those people who took loans and, of those, only people with loans whose terms were more generous than allowed by the existing policy. (All were non-HCEs, so it would not have been discriminatory.) 

[Bob the Swimmer]

EBECatty--Thanks, that's helpful.

Devil's advocate, in your case, it's not possible (or practical) to increase loan provisions in operation because not everyone had taken (or would take) a loan out.

And when you think about EPCRS going back to the beginning and I was around then----there is no disadvantaged participant here (but there is a failure to properly follow the plan's terms). In fact, only advantaged participants; and I thought SCP's purpose was to clear up more ministerial, less consequential errors that are not practical for VCP to address. 

Bottom line: What would you do if this were your plan ? Sounds like you might do the VCP. Thanks much.

[EBECatty]

Completely agree - my particular situation doesn't square exactly. My takeaway was they were very clear that the increase in benefits must be for every single participant, not just bring a subset of "disadvantaged" participants up to the same level as a subset of "advantaged" participants. 

Personally, I would probably recommend SCP, document the reasoning, and move on, but others may be more conservative based on the size of plan, client preferences, etc.

[Bob the Swimmer]

EBECatty---Thank you--I agree. After 45 years of consulting (and growing), this is one of those that I think interpreting the language provides a reasonable way forward, as Luke and Mike wisely stated. The test I have used mostly is what would I do for my own company---and I heartily agree with you. If I can allow a reflection, I have seen how expensive even the simplest fixes are for many companies under VCP and it's hard to justify how much it costs to fix something fairly simple. Thanks again and be safe.

[Mike Preston]

22 hours ago, Luke Bailey said:

... I'd be interested to hear Mike flesh out his thinking on that....

Just spitballing here, but I'm thinking about 401(b). It almost seems like we are always in a position where an amendment is mandatory.  While some things require a current amendment (interim amendments) other things can be deferred until the 2 year window opens up (required amendment and restatement).  Then, of course, there are those that aren't technically part of either (voluntary amendments).  Each of these have an associated 401(b) period.  In the olden days, the IRS would accept an amendment to any provision as long as it was made before the end of any overlapping 401(b) period.  If pressed, I wonder if a similar result could be obtained here?  Stated in a more technical manner: can the fact that an amendment and restatement window is extended by two years (with an SCP requirement, admittedly) nonetheless allow for adoption of an amendment by the end of the 401(b) period that retroactively covers the desired matching provision?  I know it is a stretch, but I wouldn't hesitate to argue it upon audit if the IRS had indegestion.

[Bob the Swimmer]

MIKE--  Agreed, great point--that's one of the things we would have to argue. Appreciate your thoughts.