Purplemandinga Posted June 7, 2023 Posted June 7, 2023 Notice 2023-43 Question 2 states: Before Rev. Proc. 2021-30 is updated pursuant to section 305(g) of the SECURE 2.0 Act, are there any Eligible Inadvertent Failures that a plan sponsor may not self-correct? The answer says: A-2. Yes. Before Rev. Proc. 2021-30 is updated pursuant to section 305(g) of the SECURE 2.0 Act, a plan sponsor may not self-correct the following Eligible Inadvertent Failures: (5) A demographic failure that is corrected using a method other than a method set forth in Treas. Reg. § 1.401(a)(4)-11(g) ... The notice also says Eligible Inadvertent Failures may be corrected within 18 months of identifying the failure more or less. Treas. Reg. § 1.401(a)(4)-11(g)(3)(i) says that a corrective amendment is not taken into account prior to its adoption under this paragraph (g) unless it satisfies each of the requirements of paragraph (g)(3)(ii) through (vii) of this section, whichever are applicable. Treas. Reg. § 1.401(a)(4)-11(g)(3)(iv) says any corrective amendment intended to apply to the preceding plan year must be adopted and implemented on or before the 15th day of the 10th month after the close of the plan year in order to be taken into account for the preceding plan year. ---My question is this. Assume there is a legitimate demographic failure that was not corrected by October 15th and no plan provisions prevent this from being anything but a demographic failure. Would the employer still be able to self-correct under Notice 2023-43 within 18 months of discovery (without a VCP filing) even though the notice says one must correct using an 11(g) method which itself states such amendments must be made by Oct 15th in the year following the failure. Would the "whichever are applicable" language allow for the Notice 2023-43 reasonableness language to prevail?
FORMER ESQ. Posted June 8, 2023 Posted June 8, 2023 What the Notice is saying, although not clearly, is that demographic failures cannot be self-corrected. If the plan is failing 401(a)(4) or 410(b) for a particular plan year, and the plan sponsor choses to timely correct the violation through an 11(g) amendment, there is technically no "demographic failure" because the violation was corrected through the code.
Purplemandinga Posted June 8, 2023 Author Posted June 8, 2023 2 hours ago, FORMER ESQ. said: What the Notice is saying, although not clearly, is that demographic failures cannot be self-corrected. If the plan is failing 401(a)(4) or 410(b) for a particular plan year, and the plan sponsor choses to timely correct the violation through an 11(g) amendment, there is technically no "demographic failure" because the violation was corrected through the code. One would think, if the attorneys who drafted the notice explicitly didn't want demographic failures to be self corrected, they would have said so. Instead, they actually refer to a demographic failure as an "Eligible Inadvertent failure" in the answer to question 2. Thus, if a demographic failure can be classified as an Eligible Inadvertent Failure, then plans should seemingly be able to rely on the 18 month time frame to correct. Let's be honest, there isn't a difference, nor any more urgency to correct a coverage failure than there is if payroll somehow inadvertently didn't allocate a nonelective to 20 employees who were eligible but were somehow overlooked/missed by the employer and during annual nondiscrim testing. The examples the notice gives for ways not to correct a demographic failure are also unclear, yet seem to suggest the IRS simply does not want plans using rate group testing, or plan restructuring to correct demographic failures. Instead, the IRS limits corrections of Eligible Inadvertent Failures of this type to using the "method" within 11(g), which can be interpreted as the correction "method" within 11(g) minus the Treasury Regulation time limitation.
Purplemandinga Posted June 8, 2023 Author Posted June 8, 2023 I think I would absolutely need clarity on this point to say without hesitation that demographic failures are still subject to the 9.5 month limitation rather than correcting within 18 months from date of discovery... Essentially, I'm still leaning towards plans using the 18 mo timeline.
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