Recognition of Service

We have recently been brought in to consult on a 401k plan.  Client is ABC Company for our purposes.  ABC Company bought a number of businesses that were in foreclosure.  Lets call them Company XYZ.  the employees of XYZ started for ABC on 1/4/2021.   The current recordkeeper redrafted the documents effective for 1/1/2021 to recognize service for Company XYZ.  The document now states that ABC Company 401(k) plan recognizes Company XYZ for eligibility and vesting.  The client is now saying this was a mistake and they didn't want that those exemptions in the document.  No communications have been made to the employees of Company XYZ even though those employees would of been eligible on 1/4/2021.  Please note that no deferrals started for those employees and the plan has a 90 day wait and 1st of the month Eligiblity.  Can ABC Company have the recordkeeper redraft the documents and remove this since no communication was given to the employees?  

Another possible approach is for the consultant (that is, you) to educate ABC about why they should include the XYZ service.  Just my opinion.

I take it that ABC is not adopting or merging into its own K plan any of the plans that covered the employees in the bankrupt business? If you merge those in, you will probably have to recognize service for vesting.

Also, I assume these were asset purchases, not purchases of stock?

Finally, Ahuntingus, you do not explicitly state whether the amendment was adopted. Was it? That is the key, I think, to whether it can be undone, not whether the employees have been informed about it yet.

That is correct.  ABC company bought XYZ as an asset acquisition.  XYZ was part of a controlled group and XYZ adopted into that controlled group plan.   ABC wanted to waive eligibility criteria so that XYZ employees could join right away.  The employees all came on with a DOH of 1/4/2021. 

The amendment was adopted effective 1/1/2021; signed on 12/30/2020.  The prior recordkeeper (this was bundled) does not have a waiver of eligility feature in their document.  So the RK drafted the document recognizing for both eligibility and vesting under predecssor employer and client signed. 

The clients intent was to waive in this group via the acquistion for 3/1/2021 for eligibility only.  So the question is can the client rescind the waiver for both eligibility and vesting and redraft the document waiving the employees in on 3/1/2021 for eligbility only?

I think the IRS position is still that "scriveners errors" doesn't exist. If the amendment was adopted you've already granted the service for vesting, it is likely that trying to unwind that would be viewed as a prohibited cutback by the IRS. You might want to check VCP to see if there is a correction for your issue if you can show what the intent was through corporate minutes and that the amendment was a drafting error.

I would tend to agree.  One caveat that I forgot to mention; no communication of any kind has been made to the employees.  I'm not sure if that changes things but figured i'd add that element to the equation.

8 minutes ago, Ahuntingus said:

One caveat that I forgot to mention; no communication of any kind has been made to the employees.  I'm not sure if that changes things but figured i'd add that element to the equation.

In my experience, as far as IRS is concerned, and most federal court judges as well, if a tree fell in the forest and there was no one around to hear it...Well, you've already admitted that the tree fell.

I agree completely with Lou S and think he's covered the options, but to clarify when he says VCP, he doesn't mean pore over Rev. Proc. 2019-19 for an answer, he means make a submission and ask to conform your plan to your intent. Iffy, but would depend on other facts.

Yes Luke, thanks for clarifying. I've never done such a submission but I have seen talk of them in other threads over the years on this site.

In my experience you have to show that what you did, which was not in the document, was consistent with employee expectations. Here you would not have that, but you would have the fact that you are catching it early and if there is no plan merger the IRS might be sympathetic on the vesting issue, e.g. if they fully vested in the other plan on its termination. The issue always comes up, i.e., when one business acquires another is it more likely hiring the employees or blending the businesses. Can be more one than the other. 

thank you for all your help.. i would agree that once that document was signed the dye was cast..