Availability of Walk-In Cap

[chris]

Client adopted a Jefferson-Pilot Standardized Prototype 401(k) in 1991. Plan year is June-May. Jefferson-Pilot ("JP") notified client it would no longer be sponsoring the plan. Somehow client wound up with Continental Benefit Administrators, Inc. ("CBA")in Atlanta. Client adopted CBA's prototype 401(k) plan in April of 1997 with the effective date of the amendment and restatement being June 1, 1996. JP's adoption agreement provided for joint & survivior annuities. CBA's adoption agreement provides that joint & survivor annuities are not allowed. This appears to be a 411(d)(6). Any ideas on how this might be remedied via Walk-In CAP?

The plan has failed 401(k) and (m) for 1995, 1996, and 1997 and no corrections have been made. There are also a number of defaulted loans and loans made in excess of statutory limits that have not been addressed in any manner. It appears that DOL audited the plan in 1997 and sent the trustee (who was also the sole shareholder of the corporation)a letter notifying him of violations of various provisions of ERISA. The letter mentioned that DOL would forward the case to the IRS. Trustee basically told DOL to get lost. No action since then from DOL or IRS. Surviving spouse (who inherited all of husband's stock) wants to get the plan cleaned up. Hence, the possibility of going Walk-In CAP to fix whatever can be fixed. Comments???? Thanks.

[RCK]

This plan clearly has a bunch of problems, and walk-in CAP seems like a viable solution. In order to do walk-in CAP, you need to have solutions to each of your problems.

Here's what I would do:

1. There is a 411(d)(6) problem with the joint & survivor annuities, and has been since 1996. The only fix is to provide them, and that may require moving to a prototype that provides them.

2. If anyone took a distribution under the CBA period of the plan, you're going to have to go back and offer them the opportunity to repay their benefits and take a Joint & Survivor annuity. It is hard to believe that anyone would take you up on this, unless they elected a life annuity and died. The surviving spouse would certainly be interested in a survivor annuity.

3. You're going to have to get those three years to a place where they pass the tests. The IRS approved method is to make additional contributions on behalf of the NHCEs. This can be extremely expensive, and you may want to try to refund contributions of the HCEs.

4. Defaulted loans. If they've actually been defaulted, I don't see that you have a problem. But assuming that they have not actually been defaulted, default them and report the income.

5. Loans in excess of limits. I don't have an idea on this one.

[chris]

Thanks for your comments...

[chris]

One other issue re Walk-In CAP is the fee for correction... Rev. Proc. 2000-16 says that the IRS can go as high as 40% of the "maximum payment amount" if it finds the errors to be "egregious" and thus it does not have to stick to the range as listed in the Rev. Proc. As I posted earlier, the trustee who was also the sole shareholder of the Company did not respond well to the DOL audit. In fact, he didn't respond at all. Also, it appears that the TPA's notified him of the plan's failing the tests and, as with DOL, he did nothing to correct the problems. In all years, he was the only HCE. The excess amounts are minimal (e.g., $1800 or less) in the big picture, but he was the only HCE. Any comments on what the IRS has found to be "egregious" in other cases?

Also, it appears that we've got 4979 10% excise tax issues to address as well as digging up the earlier DOL audit issue. Regarding the DOL's finding of violations of ERISA 404,406, and 412, the DOL letter states that further action by DOL is not warranted. It goes on to describe 4975 of the Internal Revenue Code....and states that DOL will forward the matter to the IRS. Employer has heard nothing since the 1998 DOL letter.

[chris]

RCK,

As to 3. above, I definitely agree that it would be cheaper to distribute the excess to the HCE, but it seems that doing so would not be in keeping with Sec. 6.02(B) Correction Principles and Rules of General Applicability (the language of which is the same in both Rev. Proc. 2000-16 and Rev. Proc. 2001-17). Section 6.02(B) states that "...Similarly, the correction of a failure to satisfy the requirements of 401(k)(3), 401(m)(2), or 401(m)(9) (relating to nondiscrimination), solely by distributing excess amounts to highly compensated employees would not be a typical means of correcting such failure." I guess the language in 6.02(B) doesn't necessarily preclude distribution of the excess to HCE's in all cases... Any feedback on this? Thanks.