Top Paid Group Election

A CPA asked me to review a client's ADP testing.  They left one TPA for another TPA in 2018.  The plan passed testing in the past because it used the "Top Paid Group" election.  The new TPA omitted the "Top Paid Group" election in the plan document starting in 2018 and elected to use prior testing year's results.  For 2018, the plan passed since it was using 2017 testing results.  March of this year, the TPA refunded ALL deferrals for 2019 stating the plan failed ADP testing and the client did not know the checks were being issued.  The checks were just issued and sent out.  There was no discussion regarding QNEC or anything else.  This might be a stretch - but under EPCRS (Rev. Proc. 2019-19), Section 6.02, is it possible to change the method that was used to correct the testing for 2019?  Stating the principal to keep money in the plan?  We'd ask for all the refunded money returned and the client would put in the $2,759.71 QNEC to the one NHCE who did not defer based on testing not using the "Top Paid Group" election.  That would be $69,000 put back in to restore the accounts and the HCEs keeping their tax savings.  We are definitely changing the Plan to have safe harbor in 2020 & 2021 forward.  No one ever explained Safe Harbor to them - they are interested.

2 hours ago, Rena Breeding said:

A CPA asked me to review a client's ADP testing.  They left one TPA for another TPA in 2018.  The plan passed testing in the past because it used the "Top Paid Group" election.  The new TPA omitted the "Top Paid Group" election in the plan document starting in 2018 and elected to use prior testing year's results.  For 2018, the plan passed since it was using 2017 testing results.  March of this year, the TPA refunded ALL deferrals for 2019 stating the plan failed ADP testing and the client did not know the checks were being issued.  The checks were just issued and sent out.  There was no discussion regarding QNEC or anything else.  This might be a stretch - but under EPCRS (Rev. Proc. 2019-19), Section 6.02, is it possible to change the method that was used to correct the testing for 2019?  Stating the principal to keep money in the plan?  We'd ask for all the refunded money returned and the client would put in the $2,759.71 QNEC to the one NHCE who did not defer based on testing not using the "Top Paid Group" election.  That would be $69,000 put back in to restore the accounts and the HCEs keeping their tax savings.  We are definitely changing the Plan to have safe harbor in 2020 & 2021 forward.  No one ever explained Safe Harbor to them - they are interested.

They might be interested, but they are also screwed!  Maybe they have a claim against the prior service provider for incompetence or malfeasance (but very difficult to make stick), but they can't make the top paid group election for a prior year when the plan didn't have that language in it.  There's no correction to be made under the Rev Proc since the plan DID operate in accordance with the provisions; the client just doesn't like the results of what he adopted. I'm afraid he is SOL.

9 hours ago, Larry Starr said:

They might be interested, but they are also screwed!  Maybe they have a claim against the prior service provider for incompetence or malfeasance (but very difficult to make stick), but they can't make the top paid group election for a prior year when the plan didn't have that language in it.  There's no correction to be made under the Rev Proc since the plan DID operate in accordance with the provisions; the client just doesn't like the results of what he adopted. I'm afraid he is SOL.

I've had success with VCP in a similar situation. The client had prior year ACP testing and a discretionary match. They had one bad year and made no match. The next year they went back to their typical match, and the non-HCE rate for the prior year was 0%. It would have resulted in a refund to all HCEs of about $500,000. We submitted through VCP and asked to retroactively change testing to current year. It was approved.

The plan operated in accordance with its terms (and the client certainly didn't like the results) but the IRS allowed the change. It wasn't abusive; kept money in the plan; arose from an unintended set of circumstances; etc.  Here, it sounds like there was at least poor communication and an election that the client didn't fully understand. I would give it a shot. 

Yeah - I thought that they were SOL too.  I'm grabbing at straws.  I think they were just told to sign the new plan document and did not know one way or the other that the document was changed. I will ask them if they want to consider a VCP filing. Thank you both for responding and sharing your thoughts.  R

They are also too late to adopt Safe Harbor provisions for 2020.  That ship sailed 12/31/2019.

18 minutes ago, BG5150 said:

They are also too late to adopt Safe Harbor provisions for 2020.  That ship sailed 12/31/2019.

Even with SECURE?

11 minutes ago, justanotheradmin said:

Even with SECURE?

No... The could adopt 3% SH mid year under SECURE.  Too late for SH Match though

7 hours ago, Rena Breeding said:

Yeah - I thought that they were SOL too.  I'm grabbing at straws.  I think they were just told to sign the new plan document and did not know one way or the other that the document was changed. I will ask them if they want to consider a VCP filing. Thank you both for responding and sharing your thoughts.  R

  

Wow! That would be great if they allow it. And surprising.

Can the employer change their mind on how to correct the testing?  We are still within the Plan Year(2020) after the Plan in which we failed testing (2019).  What if the HCEs return the refunds and the Employer makes a QNEC for the Non-Highly Compensated employees sufficient enough to pass testing?  I thing this would be a viable option.  Thoughts?