SVP filing for participant excluded for 15 years.

[R. Butler]

Employer adopted a profit sharing plan in 1986. The plan is a standard prototype. Employer failed to include one of its employees (that we know of) since the inception of the plan. We intend to file under SVP. 2 questions arise immediately:

1. Employer's CPA is convinced that since payroll records must only be kept for 7 years that the correction can be made just for 7 years. The employer actually does have records back to 1986. I find no basis for the CPA's position. Notice 2000-16 is clear that correction must be made for all taxable years. Am I missing something?

2. The employer omitted the employee because the employer felt that it could exclude all employees that did not average 32 hours/week. My concern is that there are others that were excluded and the employer is not telling us. I have never filed under SVP, VCR, etc. The submission requirements require that we explain how the faile arose, procedures in effect at the time etc. Is the IRS likely to see this as a red flag and audit the entire plan once the SVP is over?

[chris]

Two years ago I filed under the SVP to correct an employer's excluding approximately 45 employees over the then past seven years. With respect to the SVP, you must explain how/why it happened, procedures in place when it happened, measures taken to keep it from happening again..... In my case, I cited miscommunication problems between the e/er and the CPA making the determination of who's in and who's out. Also, put in place a procedure outling in detail the steps the e/er's personnel should take to verfiy DOH, # hours,........with respect to every e/ee hired. I included that in the SVP Request. The only communication I had with the IRS at the time had to do with how we actually calculated the back-allocations due the excluded employees. Other than that and the receipt of the "you've corrected the problem and we won't disqualify the plan" letter, I have not heard anything else from the IRS.

Going through with the SVP won't preclude a possible audit, but I would think that as long as the e/er shows good faith that it is truly trying to fix the problem, it shouldn't get referred to audit. Just make sure you've caught all of the excluded persons who are due allocations, benefits, etc. Also, make sure you catch any other problems while you're there. Additional problems, depending on their type, may cause you to be ineligible for SVP.