Admin not consistent with document

[Sue B]

My client is being audited by the IRS because their CB and PS plans are terminating. The TPA excluded 2 NHCEs from the CB plan "because that's what the prior TPA did", and it passed the numeric testing, but the plan document never stated that these two people should be excluded. These 2 employees were included in the PS plan, and received benefits every year there. Both plans are terminated, and assets are distributed.

The IRS is asking where the benefits are for these 2 employees, because the document doesn't exclude them. The TPA isn't sure why they were excluded, but they were, and everything passed testing. But the document doesn't exclude them. 

What can the client do, short of going back and calculating what the benefit would have been if they were in there and dumping that into an IRA? 

[Lou S.]

Do they have a resolution, amendment, SPD and/or SMM that shows the NHCEs are excluded? If not they were participants who were supposed to receive benefits whether or not they passed the testing.

[Sue B]

The valuation reports show that the job classes for these two employees are excluded, but the doc does not (and the SPD is generated from the doc).

This could be 6 figures in terms of contributions, which of course would be required to be made up. Does the TPA have any financial responsibility for this? The data was provided cleanly, and clearly included these two employees, and the client was told that they could be excluded year over year.

[Sue B]

In addition, the business is now gone - it shut down when the owners retired, and the plans were terminated. If the 2 employees are due a benefit, where would it come from?There's no longer any company assets?

 

[Lou S.]

I would suggest talking to an ERISA attorney. There appears to be a Plan Qualification defect discovered on Plan Audit from the information you have provided. That can get expensive beyond just funding the the missing benefits if the IRS wishes to play hardball. It sounds likely you are looking at some sort of EPCRS correction with the IRS under audit-CAP.

I'm guessing the Retired Owners were likely the Plan Sponsor and Trustee of the Plan?

[Sue B]

Yes, the retired owners were the Plan Sponsor and Trustee. If it gets expensive, does that fall to the retired owners? the TPA? The PBGC, for the benefit amounts?

[Lou S.]

You'll probably need an attorney to answer these questions. My guess is the IRS would come for the retired owners who were the Plan Sponsor. What claims they may or may not have against the TPA, I won't speculate.

 

[Sue B]

I understand, thanks for your input! I appreciate it. 

 

[Kac1214]

It would be worth searching all prior plan documents. Perhaps it was stated in an earlier version and dropped off somewhere over time. Could at least shave a few years off the cost

 

[Lou S.]

5 minutes ago, Kac1214 said:

It would be worth searching all prior plan documents. Perhaps it was stated in an earlier version and dropped off somewhere over time. Could at least shave a few years off the cost

 

That's a good point. Maybe it got inadvertently dropped in a restatement.

[Mike Preston]

The client needs to engage somebody to interface with the IRS that brings more lumber to the plate than they currently have.

[Luke Bailey]

On 10/25/2021 at 1:55 PM, Sue B said:

If it gets expensive, does that fall to the retired owners? the TPA? The PBGC, for the benefit amounts?

The IRS will view it as the company's obligation.

In similar situations, employers will sometimes view the TPA as having been at fault and seek a contribution from the TPA, with mixed success.

Not the PBGC.