correction under EPCRS for missed deferrals

Facts: I have a non safe harbor 401k plan that's been in effect for 10 years.  Initially, the Employer adopted an "owner-only" plan that had no eligibility service or hours requirements, but he also owned another Company,  that (surprise!) had employees.  While not one of these employees ever worked 1,000 hours in a plan year, they were never excluded under the terms of the original plan document. 

There are no matching contributions, and the Employer deposited a 25% profit sharing contribution each year into his and his wife's accounts. the profit sharing allocation method is prorata under the terms of the document, and there are no allocation conditions (of course).

We had planned to submit under EPCRS, as the violations don't meet the requirements for self-correction.

Question: Assuming the ADP of the two HCE owners is 30%, I assume the correction for the "missed deferral opportunity' is 50% of an ADP for NHCEs that will pass the ADP test.  That is, do I take 50% of 30% divided by 1.2 to arrive at a correction percent of 12.5%? This seems like a really burdensome correction, especially since I need to give everyone a 25% of pay profit sharing contribution!!!

Has anyone tried to use a lower % for correction purposes?

If the other company did not adopt the plan, then why do you think they should have been given the opportunity to defer?

Is the plan document a “standardized” prototype plan document?

Yes, this was a standardized prototype document.  the other employees should have been included because under the controlled group rules, they were all employed by the same Employer.

20 hours ago, Barbara said:

Has anyone tried to use a lower % for correction purposes

If you are submitting under VCP, ask for the moon and negotiate as needed with the IRS agent to find something that the employer can afford and that the IRS can agree with, something reasonable.

I think that there is no ADP test failure if no one worked more than 1,000 hours ever.  They are tested separately.

Or, the amount needed to pass the ADP test is zero, because no HCE was part of that excludable group except maybe the first year.

Any way to try to convince the service that the intention all along was to have a YOS requirement?

The idea of splitting the groups into Owners and "Otherwise Excludable" is a very interesting idea...wondering if anyone had ever tried that?

If the owner is the only employee over age 21 and with a Year of Service, then that would be the case. Of course, if any other employee was over age 21 and completed a year of service for eligibility then they are also grouped with the owner.  But yes, we do this if testing fails and if doing improves the results.

thanks, all. None of the employees ever worked 1,000 hours.