IRS flexibility for alternative corrections under VCR -excluded eligib

[Guest Jordan]

How flexible is the IRS under VCR? A 401(k) plan with a matching contribution failed to credit controlled group employees transferring to the plan sponsor with their prior group service and required them to complete an additional year of service before being eligible to make elective deferrals. When actually eligible, less than 10% of the affected employees elected to defer.

The VCR correction per Appendix B is for the employer to make a QNC equal to the ADP (for elective deferrals) and ACP (for the match) for all of them, even the 90% who never deferred into the plan. Anyone have any experience with IRS flexibility on this. We would like to make corrective contributions only for those who later deferred, the presumption being those who never did, would not have had the plan been adiminstered correctly. Cost is a 10X increase the IRS way. Seems to convert a correction to a penalty to me. Anyone?

[Kirk Maldonado]

I've found the IRS to be very reasonable on VCR matters.