VCP Needed for Standardized Plan?

A plan sponsor has been acquiring a number of companies over the last few years, most of which already had 401(k) plans in existence.  To date they have continued the separate plans though they do want to consolidate them by the end of 2018 if possible.  

One of the companies they acquired has a 401(k) on the standardized adoption agreement from a payroll company. As expected, the plan document extends the plan to all employees of all affiliated entities (relevant plan language pasted below).  There are 4 entities with plans, all a parent-sub controlled group.  The other 3 plans have 400 participants and $8 million.  The one offending standardized plan has 2 participants and $90K.  They are well beyond 410(b)(6)(c) now. 

I've recommended amending that plan with a non-standardized or volume submitter plan ASAP to fix the issue going forward.  It's an operational failure in that the plan operations don't follow the terms of the document, but there is no way to conform plan operations to the document.  I've suggested a VCP application to allow a retroactive correction of the plan document to exclude the related entities. The client wants their plans compliant but realistically this is a tiny plan and its failure does not put the other plans at risk.  

Anyone here have any experience with this issue in VCP or other ways to resolve?  Thanks.

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Document language:

10.7.5 Notwithstanding Sections 10.7.1 through 10.7.4, with respect to a Company that utilizes the Standardized Adoption Agreement, all Affiliates must participate, and the express written consent of the Company shall not be required, unless an election is made under the Adoption Agreement to utilize the Code §410(b)(6)(C) transitional rule.

An Affiliate is defined in the plan as follows:

1.1.5 Affiliate:

(a) Any corporation which is a member of a “controlled group of corporations” (as defined in Code §414(b)) which includes the Company;

(b) any trade or business under common control” (as defined in Code §414(c)) with the Company;

(c) any organization which is a member of an “affiliated service group” (as defined in Code §414(m)) which includes the Company;

(d) any other entity required to be aggregated with the Company pursuant to regulations promulgated by the Secretary of the Treasury under Code §414(o); or

(e) for entities that are not trades or businesses, in accordance with IRS guidelines as published from time to time.

Just document the oversight and retroactively amend the plan to a Non-Standardized Adoption agreement and submit under VCP. Many many many years ago, the IRS held a position that all companies were covered and the sponsor was screwed. The IRS has, since, come around to allowing this as a reasonable correction for what was clearly an oversight.

My info was merely from informal conversations with attorneys over the years. I believe a similar case was referenced in the ERISA Outline Book; if memory serves.

Good Luck!