Vesting, what happens if a participant is given 100% by mistake?

This small CPA firm has 6 employees.  A receptionist is leaving and is 80% vested at best.  The owner wants her to receive her full account balance.  The 2/20 TH vesting leaves her just short.  I suggested with the Cycle 3 restatement requirement change to a 3 year cliff which would also be TH compliant.  He want's to just give her the full account balance (her money is segregated, all segregated investment accounts).  He asked me "what if we call it a mistake, we paid her out everything by mistake, what harm would there be?"  I said it would be an operational failure, you didn't follow the document as it stands.  Would the IRS come down on them if by chance there is an audit? He wants to just do it.  

Assuming the receptionist is a NHCE, then go ahead and do an amendment to give her 100% vesting. If you are using a preapproved "fill-in-the-blank" style document it probably has a spot for special vesting provisions. You can enter something like "Jane Smith is 100% vested as of 6/8/2022" or "Receptionists who were hired in 2018 are 100% vested as of 6/8/2022" or whatever language will accomplish the desired result, as long as it is definitely determinable and not subject to employer discretion.

Do not attempt to get "cute" - one of the requirements to be eligible for self-correction under EPCRS is that the plan must have processes and procedures in place to reasonably promote compliance. If you are knowingly and willfully flouting the plan document then you are not promoting compliance.

... and do this before paying the distribution.

Zeller, I am using the ftWilliam doc, so I gather I can open the vesting section and place Suzie Doe in there and say that she is 100% vested upon her termination and that will fly?  

david rigby, I will for sure get it done prior to her being paid out.  

Thanks

39 minutes ago, Basically said:

I can open the vesting section and place Suzie Doe in there and say that she is 100% vested upon her termination and that will fly?  

It sounds good to me. Obviously I am not reviewing your actual amendment but that is the general idea.

If plan forfeitures are reallocated to other participants, per the document, doesn't making her 100% vested adversely affect the remaining employees?  i.e. if the forfeiture has occurred, per the plan document, should they be entitled to a forfeiture allocation?

17 minutes ago, jsample said:

If plan forfeitures are reallocated to other participants, per the document, doesn't making her 100% vested adversely affect the remaining employees?  i.e. if the forfeiture has occurred, per the plan document, should they be entitled to a forfeiture allocation?

This is the answer to the, "what is the harm" question.  

23 hours ago, jsample said:

If plan forfeitures are reallocated to other participants, per the document, doesn't making her 100% vested adversely affect the remaining employees?  i.e. if the forfeiture has occurred, per the plan document, should they be entitled to a forfeiture allocation?

It's a good point, jsample, but I don't think it really changes the earlier answers. Putting aside skullduggery such as that the receptionist threatened legal action over something and this is a way to keep them quiet (which could be a prohibited transaction as a use of plan assets by a fiduciary), It's the same as if the employer amended the plan to say that the non-highly compensated employees in building A get 1% and those in building B get 2% for the year. The only discrimination that is not permitted is in favor of HCEs.

If this sort of amendment occurs frequently enough, you could have an issue of whether the plan is being administered in accordance with its terms, even with an amendment, but that issue is more threatened than actually raised.