What is the best correction method for multiple failures?

[Guest]

I have an interesting situation here. 401(k) plan was established effective 5/01/98 using a standardized prototype. 401(k) deferrals only. Document provides for discretionary matching, but none has ever been made. We have been retained to advise on correction of problems, which include:

1) Consistently late depositing of deferrals. In several cases, the deferrals were not deposited until participant terminated. The employer then made the deposit with earnings. How calculated, we have not been able to determine.

2) Form 5500 for initial plan year ending 4/30/99 was never filed. We put the 2000 form on extension, which is due 2/15/01.

3) The salary deferral amounts reported to us by the employer, contributions made to the money manager and deferral contributions do not match for either of the two years of the plan's existence. We do not know which numbers to use for reporting and testing purposes.

4) It looks like loan repayments for the principal were made with pretax dollars.

I'm considering VFCP for the late depositing of deferrals, VCR for the loan problem, if it exists, and mercy for the late 5500. Is there a better way? I've ever considered self-correction as much as possible course prior to terminating the plan. Problem is, a former participant has contacted the DOL, and an agent is now asking questions. The employer really wants to clear this up, as the company has been sold and the plan is terminating. Any thoughts?

[RCK]

My initial thought is that the plan probably does not have a determination letter. And if that is indeed the case, then VCR and SVP are out. Other specific comments:

1) It seems like the employer has made his own attempt at applying APRSC. If this were an isolated case, I might be tempted to say that it's good enough (assuming that the earnings adjustment is reasonable). But with a consistent pattern of failure, APRSC is out.

2) File them both as soon as possible.

3) Somebody is going to have to balance this. Is it fair to assume that the 5500 is not subject to an audit requirement? I think that you have to start with the deferrals and follow them through to the trust (and adjusting for the earnings you mentioned earlier). I would not spend much time trying to figure out what the sponsor had supplied to you earlier.

4) I see this as a payroll issue, and would fix it there--recategorizing the loan payments as post tax and issuing a revised W-2.

My experience with the DOL is that they tend to be pretty patient and understanding at the agent level. Solve that participant's problems and they will probably go away.

You can correct multiple errors with a single filing, so you may be able to take advantage of that.

You will need to fix all the problems, or at least decide what fix you are recommending before you submit for a determination letter on the termination.

[Guest]

You are correct about no approval letter, but this is a standardized prototype. Wouldn't the plan sponsor's meet this requirement? What are you referring to in item 2? Are you suggesting that we correct the problems, then file for approval of the plan on termination? No EPCRS or VFCP? Thanks.

[RCK]

My understanding is that the Vendor determination letter on the prototype does not count as a determination letter for filing purposes.

I lined up my comment numbers with your question numbers. That is, by "file them now", I meant file the 5500's right away. File them and see what happens.

The one plan that we have that is terminating but has defects, we are planning on filing the VCR at the same time as the Determination letter filing.

[Guest]

The plan you are filing the VCR at the same time as the approval letter, are you referring to the termination approval letter?

[RCK]

Sorry--yes, we are doing the VCR filing and the Termination letter at the same time. Or at least that is our intent.

[RCK]

I was hoping to get a response to one of my earlier comments--that a vendor's determination letter on a prototype would not count as a determination letter for voluntary self correction purposes. Any comments?

[Guest CMC]

I think your answer is here:

http://www.benefitslink.com/links/20010716...16-011946.shtml

[Guest bswift]

You also need to recognize that depositing the deferrals late is a prohibited transaction, the cure for which is to file a Form 5310 and pay the pt penalty. Becuase it is a "use" pt, the penalty should be 15% of the earnings that would have been earned had the contributions been timely made.