VCP with SEP and SIMPLE 401(k) Errors

[lakesandtrees]

Hello,

One year in practice ERISA attorney here, so please, go easy on me.

FACTS

In the financial services industry, three individuals, A, B and C each maintain their own entity in which the individual has 100% ownership.

• A's LLC - maintains no plans. 
• B'S LLC - maintains a SIMPLE 401K in which only B participates
• C's Corp. - maintains a SEP in which C and spouse participate. 

Each entity has a 33% interest in the Main LLC. A, B, and C, through their entities, provide financial advice to clients of the Main LLC. Main LLC then pays A, B and C's entities 1099 income. Main LLC has five employees, none of which are A, B or C or their spouses. The employees of Main LLC have never been given the opportunity to participate in either the SIMPLE or the SEP.

CONCLUSIONS 

I've concluded that under the ASG rules, Main LLC is a FSO and A, B & C entity's are A-Orgs. Thus, Main LLC and A, B & C's entities are an affiliated service group. 

Client is the Main LLC, and its goal is to provide a retainment plan for the Main LLC and its employees. Potentially later adding in a health plan. 

My conclusion is that B LLC's SIMPLE 401(K) AND C Corp's SEP have both made significant errors and must make a VCP submission. However, how can they correct with the improperly excluded employees?

ERRORS

SIMPLE 401(k)

1. Maintained during the same year as another retirement plan. Contributions must stop immediately. 
2. Main LLC employees improperly excluded. Make corrective contributions to employees.

SEP

1. Main LLC employees improperly excluded. Make corrective contributions. 

How can both Plans be corrected? Do you undo the SIMPLE contributions/correct deferral deductions then terminate the Plan? 

 

[EBECatty]

It doesn't answer your question, but if Main LLC can elect to be taxed as a C corp, you might be able to avoid an ASG.

[R Griffith]

Not sure if this is much help, but I just listened to an old ASPPA webcast from Derrin Watson on Control Groups and ASG's.  It was mostly about identifying them and why they are important to know about.  However, it might not hurt to give Derrin a call or e-mail and see if he is willing to help discuss.  Even though you are an ERISA Attorney, is doesn't hurt to get some expert advise from someone more experienced.  Good luck - I am not sure about the correction method either.

[Peter Gulia]

Your firm should buy Derrin Watson’s Who’s the Employer?

The first time you use it will save you from incorrect advice or missed opportunities, either of which can be malpractice.

Each next time, you’ll work more efficiently so you and the partners won’t waste unbillable time.

[QDROphile]

Speaking of partners, which you did not, are there any other ERISA lawyers in your organization? They should be your first consult after doing  the fundamental work and then hitting a snag. If your organization environment is based on fear and criticism (which might be making you averse to seeking in-house guidance or assistance) rather than cooperation, camaraderie, and mutual advancement, you don’t want to work there. Maybe it had been determined that nobody else knew the answer, either, and you got the short straw. Still, reporting back for consideration by others after your analysis and learning should not be shameful. If you are on your own, then bless you. ERISA legal expertise and practice is awfully difficult and scary to develop by yourself.

[lakesandtrees]

@Peter Gulia Thank you for the suggestion, I've reached out to our firm's librarian to see if I can secure a copy.

@QDROphile Yes I do have a great partner who has a wealth of experience and is always willing to advise. Unfortunately they were out of town last week but I will be consulting with them today. I was hoping to continue moving forward on the issue while they were away. Thus, I posted here. Thank you!