SCP correction - retroactive adoption of plan

A parent company plan sponsor has affiliates that are part of an affiliated group as defined by the Code. The plan document states that employees of the affiliates can participate in the parent company plan as long as the affiliated companies adopt the parent's plan. Unfortunately, employees of the affiliates participate in the parent's plan, but the affiliates never adopted the plan, and the plan is now under investigation by the IRS. My proposed solution is that SCP allows for self correction of insignificant operational errors even if the plan is under investigation. I can make a good argument that this is an operational error since the plan document was not followed, and that its insignificant since it only involves a handful of employees and the dollar amounts involved are very small. Thus, I propose having the affiliates adopt the parent plan and such adoption would be dated and signed currently by the affiliates, but it would be drafted to have retroactive effect back to the date the affiliated employees started to participate in the plan. Any comments or concerns with this approach using SCP?  

Our position is you can retroactively amend a plan (under specified conditions) but that you can't retroactively "adopt" a plan = which is what you would be doing with respect to the participating employers.  We think this needs a VCP filing to approve.

Thank-you. Do you know what support there is under EPCRS/SCP to prohibit affiliates from retroactively adopting a parent's plan especially given that their employees were already participants in the plan. Again, it seems like an operational error since the plan document requires the affiliates to adopt the plan to enable their employees to participate. It seems that it would be problematic if the the plan sponsor never adopted the plan but possibly a better argument could be made that an operational error occurred if the affiliate did not comply with the plan document and did not adopt. Unfortunately we can't use VCP since the plan is already under IRS audit.  

Well, it is an operational error - so EPCRS controls - but it isn't specifically authorized as SCP correctable.  So, no, I can't disprove the negative here.  The question is where is there authority to "retroactively adopt" a plan containing retroactive salary deferrals.  Check out some the webinars from Derrin Watson and Ilene Ferenczy (and her website - I think she's commented on this as well).

OK Thank-you for your help!

As you noted, since the plan is under examination by the IRS, SCP is only available for insignificant operational failures.  The IRS agent will decide if it is insignificant.  I would try suggesting your plan in your first post.  If they don't approve it, I would probably suggest removing the ineligible people from the plan as an SCP correction.  The IRS usually wants amounts left in the plan, so that might encourage them to reconsider your first option.  If they don't let you correct under SCP, you will be under audit CAP.  Best case for the Audit CAP sanction Is the amount the VCP filing fee would have been. It may be higher.  Good luck.

From Section 4.01(b) of Rev. Proc. 2021-30:

"A Plan Document Failure consisting of the initial failure to adopt a Qualified Plan, or the failure to adopt a written § 403(b) Plan timely in accordance with §1.403(b)-3(b)(3) and Notice 2009-3, 2009-2 I.R.B. 250, is treated as a Plan Document Failure that is not eligible to be corrected under SCP." So VCP, or in your case, Ananda, Audit CAP.

One other approach is to focus on is how an affiliate adopts the plan. Usually you think of a participation agreement or resolution, but other evidence of adoption may be enough to convince an agent that the plan was adopted by the affiliate. 

Thank-you for your comments. Regarding the suggestion to try to obtain "other evidence of adoption" of the plan by the affiliate I'll try to do this. The affiliate is 100% owned and the parent and affiliate are typically treated by the organization as one and the same and that is why the affiliate never adopted the plan.

Regarding the EPCRS section stating a "plan document failure consisting of the "initial " failure to adopt is not eligible for SCP correction, I view this as applying to the initial adoption of the plan by the parent company, and  as the "initial" adoption this would not qualify for SCP relief if the plan was never initially adopted.. However, the "subsequent" adoption by an affiliate arguably is distinguishable from the initial adoption and should qualify for SCP relief. Alternatively under SCP, I would argue that the plan should be amended retroactively to state that affiliate employees were eligible to become plan participants. Again I would argue that this is an insignificant operational failure and SCP allows operational correction by amendment as long as it benefits the impacted plan participants but there is no longer a requirement to benefit all plan participants.   For me, it would be absolutely unacceptable from a Title I ERISA standpoint, if the Service tried to argue that employees of the affiliated company that did not adopt the plan, retroactively are no longer plan participants which would result in inreperable harm to them. 

1 hour ago, Ananda said:

The affiliate is 100% owned and the parent and affiliate are typically treated by the organization as one and the same and that is why the affiliate never adopted the plan.

Who then actually is the Employer?  If the work for the affiliate is indistinguishable from that of the parent, or the work is for the benefit of and under the control of the parent, then they would be considered employees of the parent. Whose name is on the paycheck? No corrective action is necessary then, the Plan is operationally correct.

7 hours ago, Ananda said:

Regarding the EPCRS section stating a "plan document failure consisting of the "initial " failure to adopt is not eligible for SCP correction, I view this as applying to the initial adoption of the plan by the parent company, and  as the "initial" adoption this would not qualify for SCP relief if the plan was never initially adopted.

Ananda, since we're dealing with EPCRS, which is a discretionary IRS program, it's how the IRS views it that matters. Did you find any specific elaboration in Rev. Proc. 2021-30 of this issue that would support your view ?

I think Kevin's post hits the nail on the head.