Plan sponsor failed to offer plan and report information on several th

[Guest MES]

Company sponsors 401(k)plan effective 1/1/98, with a 1000 hour service requirement. 7/15/98 they amend service requirement to 3 months of service. No employees were ever excluded. They have previously only reported 40-50 employees for testing purposes. This year during a conversation the plan sponsor indicated that she provided almost 9,000 W2s because this company is a temporary agency. How could such a problem be corrected? It appears that if QNECs would be required for all of these individuals, it would cost much more than the current value of the plan. Any suggestions?

[Jon Chambers]

In my opinion, you have neither a qualified plan nor a fixable problem. As a practical matter, the best solution might be to terminate plan, distribute assets, not permit rollovers (since source was not qualified), and don't withhold taxes. I'm not sure how I'd report distributions--on a 1099 maybe. Then hope that nothing gets audited. Note that none of this is "legal"--it's just a practical way out of a bad situation.

A possible alternate solution is a retroactive amendment excluding the 9000 temps, and an EPCRS filing, although I'm not sure that this could work--how could you possibly pass coverage?

Finally, there's the "come clean" alternative. Restate 1998-2000 W-2's for the 40-50 employees, have the employees amend their 1040 returns, include plan investment earnings in each year's taxable income and amend corporate tax returns to eliminate any deductions for plan contributions. Basically put everyone back where they would have been if the plan didn't exist. This is the legal approach.

I'd suggest that your client needs to get competent tax and legal advice to figure out how to get out of a really big mess.