403(b)(9) church plan - VCP

A non-electing 403(b)(9) church plan has an employer with several operational errors. The employer is currently working towards submitting a VCP application. It has been identified by one person in this organization that part-time employees working 20 hrs/week or more were never given the opportunity to participate via salary deferral. Now, the plan is not subject to the Universal Availability rule, BUT the overall plan document indicates default eligibility for deferral participation as 20 hrs/week UNLESS an employer overrides this eligibility with a statement on its Employer Adoption Agreement in which they can raise or lower the hour threshold. This employer did not indicate a threshold for eligibility on its Employer Adoption Agreement. However, one of the individuals believes because the employment offer to one or more part-time employees stated there would be "no benefits" with the part-time position(s), he believes that there was not an operational failure to follow the written plan document.

Is he right? Is this a case of "facts and circumstances" in which the employer could justify not giving an opportunity to participate because the employment offer stated no benefits would be available? 

Thanks in advance for your responses.

KJ

The employee did not waive participation in the plan, for example, by signing an "opt out" notice voluntarily declining participation. The employee was never informed of her eligibility to participate. Perhaps, one may argue that agreeing to the terms of employment with "no benefits" is an opt out? One may also argue that a deferral only participation class is not a "benefit" because it does not include an employer contribution or match.

I am looking forward to reading others' thoughts on this.

KaJay, all I can tell you is that in VCP the IRS may, depending on a number of factors, permit an employer to amend a plan retroactively to conform the plan's terms to how the plan was operated, but the employer has to show that it consistently operated the plan in the manner that it now wants to conform the document to and also that employees were informed of the way the plan operated. So you would need to gather ALL the offer letters, make your case to IRS as to what "no benefits" meant in context, etc. The result you get will be driven in part by the skill of your advocate, but he or she cannot work miracles, of course, so the facts are the most important thing.

Thank you for your response, Luke. I do think the employer operated the plan how it now wants the plan to operate, but if part-time employees were never informed of plan, are you saying that the employer could argue "that employees were informed of the way the plan operated" based on the offer letters?

KaJay, if all the part-timers got the offer letters saying "no benefits," and if the context of the overall letters and any other supporting documentation and other facts and circumstances is consistent, you might have a chance. Whether it is worth the cost of submission depends on how much is involved and an evaluation of the case.

The universal availability requirements do not apply to churches (IRC 3121(3)(A) or QCCOs (IRC 3121(3)(B)).

Ellie, 

I am aware that churches are not subject to UA, as mentioned in my first post of this thread. Churches are subject to the terms of their written plan document, however, and their document established participant eligibility at 20 hours per week.