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Interesting situation re participating employer


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We've been asked to take over a plan that was effective 1/1/2023. Employer got mad at the TPA for reasons unknown, and wants us to do admin for 2023. The 2023 document that was adopted is the document sponsored by the prior TPA.

So - Employer A adopts a plan, effective 1/1/2023. Employer B's employees are allowed to participate in employer A's plan. Here's the problem.

The owners of A also have ownership in B, but NOT sufficient to constitute a Controlled Group. Nor are the businesses an Affiliated Services Group. And although A's plan provides for Multiple Employer Plan provisions, employer B did NOT sign any type of participation agreement/joinder agreement, etc., as required under the MEP provisions in A's plan.

In an ERISApedia webcast re IRS Notice 2023-43, this question came up in the context of a CG/ASG, where the related employer did not adopt the plan. The presenters' opinions were that although 2023-43 does not allow self-correction of failure to initially adopt a plan, because the plan had been adopted by the "employer" under the CG/ASG rules, that this is an operational failure that can be self-corrected.

Although it is a "no harm no foul" type of situation, I feel like extending this treatment to a situation where the employer *(B in this case) is not "related" under the CG/ASG rules may be stretching the point too far. Curious as to any thoughts you may have?

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Assuming that B's federal income tax filing for 2023 is on extension, how about having them adopt the plan retroactively under 401(b)(2)?

Of course, if this is a 401(k) plan and B's employees are deferring then you have a problem since deferrals can't be effective before the employer adopts the plan.

I think this would be an easy VCP, just get the IRS's blessing to adopt the plan retroactively and let the contributions stay in the plan.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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I suggest considering what explanation you would present to the IRS to support a VCP filing, and gathering any supporting documentation.  You will then be in a better position to assess whether the story is plausible. 

Sometimes the IRS surprises us when they look at communications to employees, minutes of board meetings, correspondence with service providers, participant elections and other similar documentation of an operating plan, and then they conclude that a plan actually existed.  The conclusion is based on well-documented intent and actions that indicate everyone - plan sponsor, employees, service providers - all believed that the plan was formally established.  A no-harm-no-foul situation seems like a likely candidate for this outcome, but ultimately that is not our decision.

Random thought:  This situation looks like an operational failure when viewed from the perspective of the plan adopted by Employer A.  It was the Employer A plan that allowed Employer B employees to participate.

If you have a good story to tell but would like the assurance of a VCP, you may want to consider at VCP Pre-submission Conference.  Anecdotally, plans that have used the process have reported that having a discussion with the IRS beforehand provided an opportunity for open dialog with then led to a quick conclusion of the VCP.

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