SEP excluded employees

We were brought in to look at a SEP for a company in a controlled group because they didn't cover (2) employees in another company. (Not only that but they didn't include a partner in the sponsoring company.)  One employee was excluded for two years and one for one year, and the partner for three.

My reading of EPCRS is that this is a significant failure and not eligible for SCP; must go through VCP. Is that correct? Any experience with fixes for this other than giving the employees the same percentage as the partner who got the contributions?

Bird - what's the timeframe on this? A significant operational failure can be corrected by the end of the third plan year following the plan year for which the failure occurred.

I agree, I don't see any basis for a correction other than making up the contribution, with earnings, at the same percentage level, although if it does go to VCP, you could try a fix without giving anything to the partner - don't know if that would fly.

Any possibility that this wasn't initially a controlled group, but became one, so that transition rules might apply?

4 hours ago, Belgarath said:

Bird - what's the timeframe on this? A significant operational failure can be corrected by the end of the third plan year following the plan year for which the failure occurred.

I agree, I don't see any basis for a correction other than making up the contribution, with earnings, at the same percentage level, although if it does go to VCP, you could try a fix without giving anything to the partner - don't know if that would fly.

Any possibility that this wasn't initially a controlled group, but became one, so that transition rules might apply?

I thought SEPs couldn't use VCP for a significant failure of any kind? We are within the three year period.

It's a CG from the get-go, thanks.

I assume you mean SCP for significant failure? Yes, you are correct - let me get some bearnaise sauce to improve the taste of the crow I must eat. Odd that a SEP is carved out on SCP for significant failures.

Just now, Belgarath said:

I assume you mean SCP for significant failure? Yes, you are correct - let me get some bearnaise sauce to improve the taste of the crow I must eat. Odd that a SEP is carved out on SCP for significant failures.

Thanks. Yeah, probably some technical issue that they can't let them self-correct or they just recognize that they are generally poorly overseen and letting people self-correct is likely to be fubared as much as the original "administration."

Hi Bird - it just occurred to me - take a look at Appendix B, .01(2). Do you read that as allowing a SCP fix for the SEP?

P.S. - also Appendix A, .01 - similar language.

20 hours ago, Belgarath said:

Hi Bird - it just occurred to me - take a look at Appendix B, .01(2). Do you read that as allowing a SCP fix for the SEP?

P.S. - also Appendix A, .01 - similar language.

I gotta be honest, don't understand the language. The chart makes it seem not self-correctible. Sigh, I might have to print it all out and concentrate.

FWIW, I don't read it as allowing the SCP fix for a significant error. If you take it in a vacuum, yes. But given the language/info in earlier sections of the RP, and the chart as you mentioned, it seems like pushing a tenuous position.

More on this - they maximized SEP contributions for a partner (wife) and did not make any contributions for another partner (husband), as well as two regular employees for two years, 2019 and 2020.

Does anyone have experience with SEP corrections (or PS I guess) and whether the IRS would be likely to allow a fix that involves giving some of the wife's prior contributions to the husband? This would of course lower her percentages and thereby lower the amounts owed to the other employees, and eliminate the need to make new contributions for the husband.

(If you're wondering, we have spoken to an ERISA attorney but this person obviously had no direct experience in such a situation and I was not comfortable with that lack of experience.)

I've done SIMPLE VCP's, but I don't ever recall doing one for a SEP. Certainly not recently. But IMHO, I'd be surprised if the IRS would accept this. They don't generally like a fix that screws a NHCE.

Unless you can convince them that depositing it all to the wife's account was a mistake, and this is just correcting it...they might go for that. If 'twas me, I'd just play it straight.

1 hour ago, Belgarath said:

I've done SIMPLE VCP's, but I don't ever recall doing one for a SEP. Certainly not recently. But IMHO, I'd be surprised if the IRS would accept this. They don't generally like a fix that screws a NHCE.

Thanks for the feedback. I could be mis-remembering, but I thought I remembered hearing of a similar scenario where I was shocked at what they let someone "get away with." That's the only reason I considered this.

You can always ask in the VCP application and be prepared to negotiate, but don’t set any expectations with the plan sponsor that the IRS will just accept that as the solution.