Company’s hidden 401k program

Came across situation where business owners have been excluding multiple employees from 401k program. Most employees (5 current employees and unknown number former)were not informed of plan.(Some for over 10 yrs) they are all eligible. I’m not even sure how to start unwrapping this barrel of worms. Most asked about 401k on hire but we’re told wasn’t available. Doesn’t mention in employee benefit package So owners feel they don’t hav to offer access

While I wouldn't call it common, unfortunately it's not unheard of - especially when the plan has a SH match.  The wheels turn and the light goes on - "so if nobody contributes I don't have to contribute for them...mmm."

The question is whether the business owners are motivated to fix it at all, especially when they find out the potential cost.  (As a TPA) I'd generally make some gentle suggestions about what would need to be done to fix it, or suggest that they might be able to slink away into the night and terminate it asap, but without my involvement.  Let 'em stew in their own juices along with whomever let it happen.

Maybe it's not a real (ie, qualified) plan?

9 hours ago, Whop said:

Came across situation where business owners have been excluding multiple employees from 401k program. Most employees (5 current employees and unknown number former)were not informed of plan.(Some for over 10 yrs) they are all eligible. I’m not even sure how to start unwrapping this barrel of worms. Most asked about 401k on hire but we’re told wasn’t available. Doesn’t mention in employee benefit package So owners feel they don’t hav to offer access

Their plan does not meet qualification requirements; do they really want to bring it into compliance?  I'm guessing (based on their past behavior) that they do not.  I would tell them to hire a good ERISA attorney to advise them because they have civil liability to those folks who should have been included but were not.  I would not touch this.  They deserve everything they get!  I have no sympathy for these jerks. And I wonder about the admin firm that handled the plan for over 10 years???? How did they not see these issues?  And what about top heavy? And was it suppose to be a safe  harbor plans? And and and......

The owners of company classify themselves as employees. They have had their son and daughter work and contribute as well. So plan is basically 4 employees  considered ownership with 2 non owner employees in plan with 6 excluded current employees.  This is not counting former employees that may or may not have been included. They switched firms that administer the plan 6 years ago.  So I’m not sure at this point about anything.  How the test or self audit allowed situations to occur unless it was intended 

Would not the fees, fines, taxes, and civil liabilities make this still cheaper to do proper corrections.  In order to bring plan in to compliance than allow to be disqualified 

As Larry said, based on the description, the plan is not qualified. The only way to make it qualified would be IRS Voluntary Correction Program. You have MANY issues surrounding as well.

1 hour ago, Whop said:

The owners of company classify them selves as employees. The have had son and daughter Work and contribute as well. So plan is basically 4 ownership with 2 non owner in plan with 6 excluded current employees  they switched firms that administer the plan 6 years ago so I’m not sure at this point How and test or self audit allowed to occur unlesss was intended 

 

Would not the fees fines and taxes. And civil liabilities make this still cheaper the do proper corrections than allow to be disqualified 

Whop: PLEASE!  If you are going to  post and ask for assistance, please take the time to go back and read what you wrote and please put it in english so that we can understand.  It is very distracting to try to read what you wrote above.  Punctuation and spelling matter (at least, somewhat: we understand typos).  

I thought maybe bringing plan into compliance would be way to get best outcome of a terrible situation for all parties. But I guess it is time to grab my fiddle and play the role of Nero. 

8 minutes ago, Whop said:

I thought maybe bringing plan into compliance would be way to get best outcome of a terrible situation for all parties. But I guess it is time to grab my fiddle and play the role of Nero. 

Well said!

If anyone were interested in saving these Augean stables (one of Hercules' 12 labors), they should demand a hefty retainer up front. Once the clientvrealizes the magniyude of the monster they have vcreated, I am sure that the owners will develop a convenient memory and forget that you are trying to save them from plan disqualification. At some point. their lack of memory will be converted to blame cast upon you. the retainer will help protect you from loss of interest when their memory conveniently forgets your role in this and from the indignities you will be sure to endure during the blame phase.

20 minutes ago, rocknrolls2 said:

If anyone were interested in saving these Augean stables (one of Hercules' 12 labors), they should demand a hefty retainer up front. Once the clientvrealizes the magniyude of the monster they have vcreated, I am sure that the owners will develop a convenient memory and forget that you are trying to save them from plan disqualification. At some point. their lack of memory will be converted to blame cast upon you. the retainer will help protect you from loss of interest when their memory conveniently forgets your role in this and from the indignities you will be sure to endure during the blame phase.

Well said; exactly what went into my earlier concise comment: "I would not touch this. "

A TPA really shouldn't discuss much of this with them, but instead refer them to legal counsel.  In addition to qualification issues all the improperly excluded employees have possible claims against the plan, plan sponsor and fiduciaries.  And there are substantial civil penalties in ERISA as well as criminal penalties for some things.   The sponsor needs to understand all of this and they need to do so under the protection of attorney-client privilege.  

Whop, it probably can be fixed in VCP, but the client must have an estimate of the cost of correction (largely in terms of the cost of additional contributions, as it does not appear to be complex from a legal/tax standpoint), as well as their exposure to IRS if they don't correct, so that they can weigh the alternatives.

In a similar situation, we worked with a client to file anonymously with the IRS program to permit it to disqualify the Plan.  It had never been administered properly (despite the TPA's instructions) and the client did not want to pay for correcting all of the errors.  We got the IRS to approve the application, and the non-HCE participants in the Plan were permitted to rollover their accounts to IRAs so they were not harmed (although it appears in this scenario that perhaps there are no non-HCEs with accounts.  

I agree that an ERISA attorney should be involved to maintain attorney-client privilege.

If all you are worried about is the IRS don't actuaries have privilege?

46 minutes ago, Mike Preston said:

If all you are worried about is the IRS don't actuaries have privilege?

That's a question an actuary should answer, Mike.

17 hours ago, Mike Preston said:

If all you are worried about is the IRS don't actuaries have privilege?

What privilege is the issue? Neither lawyers nor accts nor EA (either flavor) have lawyer-client type privilege.  Is that what you are talking about? 

5 hours ago, Larry Starr said:

What privilege is the issue? 

Possibly, Mike refers to IRC 7525?

4 hours ago, david rigby said:

Possibly, Mike refers to IRC 7525?

That could very well be, but I believe that provides no privilege with regard to employees suing for their rights; I think, unlike their lawyer, their EA or even CPA will be subject to complete discovery by the employee's counsel.   I think that's the way I remember it.  7525 offers some protection but only from the IRS and never in a criminal matter, whereas the atty has complete privilege even (especially) in a criminal matter. FWIW.  Correct me if I have mis-remembered that provision.

On 5/22/2020 at 4:03 PM, Mike Preston said:

If all you are worried about is the IRS don't actuaries have privilege?

Is this situation a situation where only the IRS is at issue?

14 hours ago, Mike Preston said:

Is this situation a situation where only the IRS is at issue?

Mike, the employees who were impermissibly left out have civil claims which don't involve IRS and all discussions with the acct or EA(s) would be discoverable, FWIW.  Better to have an attorney involved who hires the acct/EA and thus the work done by them becomes lawyer work product and would have privilege.

On ‎5‎/‎24‎/‎2020 at 11:08 AM, Larry Starr said:

Mike, the employees who were impermissibly left out have civil claims which don't involve IRS and all discussions with the acct or EA(s) would be discoverable, FWIW.  Better to have an attorney involved who hires the acct/EA and thus the work done by them becomes lawyer work product and would have privilege.

Larry, yes, but.... The exception to privilege that you are referring to in ERISA cases is based on the idea that when an attorney represents a plan, he or she is really representing it participants, and therefore the participants can be viewed as clients for purposes of privilege. Here, if the attorney were engaged and paid by the company and/or its owners, and the engagement is only to determine tax and civil protection for the owners, and not to represent the plan, and the engagement letter makes that clear, the communications between attorney and client (the company and/or owners), e.g. regarding their tax and civil exposure and how to protect against those, would be privileged in any civil suit by the plan's participants against the company or owners. If the company decided to go the VCP route, then representation of the plan in the VCP (even though not paid for by the plan), whether by the same or a different attorney, would probably not be protected by privilege from the participants in a civil suit. If you're talking only tax, then practically speaking CPAs and EAs have significant privilege under IRC sec. 7525.

26 minutes ago, Luke Bailey said:

Larry, yes, but.... The exception to privilege that you are referring to in ERISA cases is based on the idea that when an attorney represents a plan, he or she is really representing it participants, and therefore the participants can be viewed as clients for purposes of privilege. Here, if the attorney were engaged and paid by the company and/or its owners, and the engagement is only to determine tax and civil protection for the owners, and not to represent the plan, and the engagement letter makes that clear, the communications between attorney and client (the company and/or owners), e.g. regarding their tax and civil exposure and how to protect against those, would be privileged in any civil suit by the plan's participants against the company or owners. If the company decided to go the VCP route, then representation of the plan in the VCP (even though not paid for by the plan), whether by the same or a different attorney, would probably not be protected by privilege from the participants in a civil suit. If you're talking only tax, then practically speaking CPAs and EAs have significant privilege under IRC sec. 7525.

We are 100% in agreement.  It can be pesky however to make sure you are not overstepping your "privilege" only to find out that everything you said is discoverable and possibly bad for your client.  The watchwords here are be very careful in these situations and consider the issue of privilege before you go sending emails that might not be in the best interest of your client if discovered by "the other side".  FWIW.

32 minutes ago, Larry Starr said:

We are 100% in agreement.  It can be pesky however to make sure you are not overstepping your "privilege" only to find out that everything you said is discoverable and possibly bad for your client.  The watchwords here are be very careful in these situations and consider the issue of privilege before you go sending emails that might not be in the best interest of your client if discovered by "the other side".  FWIW.

OK, Larry. Agreed.

Whop, do they have a Plan Document and have they filed Forms 5500?  Maybe they don't really have a 401k?

Beyond others’ observations:

An Internal Revenue Code § 7525(a) privilege can apply only if the practitioner’s practice is subject to Federal regulation under the Treasury department’s “Circular 230” rules and the practitioner’s advice sought is within her proper scope under those rules.

https://uscode.house.gov/view.xhtml?req=(title:26%20section:7525%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section7525)&f=treesort&edition=prelim&num=0&jumpTo=true

For some kinds of nonlawyer practitioners, the rules limit what a practitioner is authorized to do.  For example, an enrolled actuary is limited to issues involving specified Internal Revenue Code sections, and the range of them is not intuitive.  For example, while all of § 401 is covered, none of § 402 is; and for § 403, only § 403(a) is covered.

31 C.F.R. § 10.3(d)(2):

Practice as an enrolled actuary is limited to representation with respect to issues involving the following statutory provisions in title 26 of the United States Code: sections

401 (relating to qualification of employee plans),

403(a) (relating to whether an annuity plan meets the requirements of § 404(a)(2)),

404 (relating to deductibility of employer contributions),

405 (relating to qualification of bond purchase plans),

412 (relating to funding requirements for certain employee plans),

413 (relating to application of qualification requirements to collectively bargained plans and to plans maintained by more than one employer),

414 (relating to definitions and special rules with respect to the employee plan area),

419 (relating to treatment of funded welfare benefits),

419A (relating to qualified asset accounts),

420 (relating to transfers of excess pension assets to retiree health accounts),

4971 (relating to excise taxes payable as a result of an accumulated funding deficiency under § 412),

4972 (relating to tax on nondeductible contributions to qualified employer plans),

4976 (relating to taxes with respect to funded welfare benefit plans),

4980 (relating to tax on reversion of qualified plan assets to employer),

6057 (relating to annual registration of plans),

6058 (relating to information required in connection with certain plans of deferred compensation),

6059 (relating to periodic report of actuary),

6652(e) (relating to the failure to file annual registration and other notifications by pension plan),

6652(f) (relating to the failure to file information required in connection with certain plans of deferred compensation),

6692 (relating to the failure to file actuarial report),

7805(b) (relating to the extent to which an Internal Revenue Service ruling or determination letter coming under the statutory provisions listed here will be applied without retroactive effect); and

29 U.S.C. {§} 1083 (relating to the waiver of funding for nonqualified plans).