Plan Document Re-Statement Error

[John K]

Under an IRS audit, it was discovered that the most recent statement of the plan documents indicated that eligibility used the elapsed time method.  The prior (correct) statement indicated the eligibility required 12 months of service in which you work 1,000 hours.  The plan has always been operated with the 1,000 hour requirement.

Would this require a submission through the VCP or would a self-correction in the form of an amendment suffice?  The fact this was discovered under audit and is a 'further restricting' amendment has me worried that this would require the correction filing and fee to the IRS.

(Plan is profit-sharing only / no deferrals)

[Bill Presson]

If it's discovered under audit, I think you are looking at Audit CAP and not VCP.

[RatherBeGolfing]

21 minutes ago, Bill Presson said:

If it's discovered under audit, I think you are looking at Audit CAP and not VCP.

Indeed.  And if it wasn't under audit, it would be VCP.  

IRS Notice 2023-43

Quote

 Q-2. Before Rev. Proc. 2021-30 is updated pursuant to section 305(g) of the SECURE 2.0 Act, are there any Eligible Inadvertent Failures that a plan sponsor may
not self-correct?
 A-2. Yes. Before Rev. Proc. 2021-30 is updated pursuant to section 305(g) of the SECURE 2.0 Act, a plan sponsor may not self-correct the following Eligible Inadvertent Failures:

(6) An operational failure that is corrected by a plan amendment that conforms the terms of the plan to the plan’s prior operations in a manner that is less favorable
for a participant or beneficiary than the original terms of the plan.

 

[John K]

17 hours ago, Bill Presson said:

If it's discovered under audit, I think you are looking at Audit CAP and not VCP.

 

16 hours ago, RatherBeGolfing said:

Indeed.  And if it wasn't under audit, it would be VCP.  

IRS Notice 2023-43

 

Thank you both for the valuable information.  I was reading about audit CAP on the IRS website but was a bit unsure if this issue would fall into the scope of this correction method.  Notice 2023-43 is exactly what I was looking for.

Cheers

[CuseFan]

What are the implications? Would you have longer term PT <1000 hours become eligible due to elapsed time? What are the requirements for a PS contribution? If there are people technically in, but who do not get a PS because they worked <1000 hours, and if the plan is not top heavy and can pass coverage (these could be otherwise excludable, so likely OK there), then might this be a non-event from an administrative perspective that can be fixed with a prospective amendment with the intended language? This could also, if properly worded, "kick out" those who never worked 1000 hours. If this doesn't work then I agree it's audit CAP which likely also requires some contributions for those unintended entrants.

[John K]

On 6/5/2024 at 2:56 PM, CuseFan said:

What are the implications? Would you have longer term PT <1000 hours become eligible due to elapsed time? What are the requirements for a PS contribution? If there are people technically in, but who do not get a PS because they worked <1000 hours, and if the plan is not top heavy and can pass coverage (these could be otherwise excludable, so likely OK there), then might this be a non-event from an administrative perspective that can be fixed with a prospective amendment with the intended language? This could also, if properly worded, "kick out" those who never worked 1000 hours. If this doesn't work then I agree it's audit CAP which likely also requires some contributions for those unintended entrants.

The auditor found a few employees that 'should have' entered the plan and received PS funds, according to the faulty re-stated adoption agreement that states the elapsed time method is used (sent previously, so the IRS has the faulty docs).  The plan has always operated with the 1,000-hour requirement and it was never amended to use the elapsed time method.  This is where I'd like to make a corrective amendment to the adoption agreement (on account of a drafting error), but it is 'decreasing' benefit, and found due to an open audit.  That's where I feel like the audit CAP resolution is required.....  No response from the auditor yet.

I'm not sure I answered your questions properly, but thanks for your input!  I'm a new QKA, so dealing with these historical errors is pretty intimidating... especially given the fact this scenario could result in large additional contributions and years of lost earnings.

[CuseFan]

2 hours ago, John K said:

and received PS

That was the real issue in question, in addition to entering the plan under the mistaken elapsed time eligibility, did they also satisfy the requirements for a PS allocation, and it looks like the auditor believes that to be the case.

[Paul I]

If the plan is going to attempt to argue that there was no intention to change to elapsed time when the restatement was made, then the plan likely will need additional documentation beyond the prior documents and administrative practices have always had an hours requirement.  For example:

• Have all communications to participants about the plan amendment referred to the hours requirement?  Look at the language in the SPD or Summary of Material Modifications, emails or memos to participants describing the restated document, and description of plan provisions on a plan website.  Also look at any summary of plan features in required notices that may have been sent to participants such as Automatic Enrollment Notices, Safe Harbor Notices, QDIA Notices or 404(a)(5) disclosures.
• Is there written documentation any discussion of a change to elapsed time in Board meetings, Plan Committee meetings, exchanges of information with the recordkeeper, payroll or plan's legal counsel about changing the eligibility requirement?  If there is none, then a total absence of any discussion of such a change also can be an important point supporting the position that no change was intended.

Assuming that this information supports the position than there was not intention to change to elapsed time, the plan may consider providing the information to and engaging with the auditor. 

If you are new to the business and find this situation pretty intimidating, you should tell others who are involved with the plan who have experience with these situations, and those who can speak for the plan.  The auditor will communicate directly with the plan administrator, and it is possible that the plan administrator also is feeling intimidated. 

Given the potential stakes, consider a recommendation to involve an ERISA counsel, ERPA or experienced plan consultant to provide input and guidance.