Late 204(h) Notice

Am hoping those with more DB plan experience may be able to help.  Details are below but the basic questions are:  (1) how easy is it to get waiver of excise taxes for a late 204(h) notice if you provide participants the additional benefits as if notice was timely sent and (2) if that's not easily done, can you rescind or revoke prior plan amendment (freeze) and just provide additional benefits due through present,  amend / terminate with proper notice now, and avoid excise taxes where that ends up a cheaper fix than paying the excise taxes?

We have a new client with large cash balance plan.  They adopted an amendment to do a hard freeze last year.  The 204(h) notice was sent to participants 23 days before the freeze took effect.  It appears the actuary thought the 204(h) rules only required 15 days' notice and was unaware large plans had to provide 45 days' notice.  This is not a situation where any exception to the general 45 days' notice appears to apply.  Employer relied on actuary for advice and guidance on the freeze but is not necessarily looking to recover against the actuary.  Just trying to address and move on.  This has come up because the company is about to be sold and the plan will be terminated in connection with the sale, etc.

If I read the 204(h) rules and regulations applicable on or after June 7, 2001 (and Sal's interpretation), it appears the freeze amendment can stand but significant excise taxes will be assessed at the rate of $100 per day per missed individual for each day of noncompliance.  Where the notice was sent to all applicable individuals on the same day but was sent 22 days late, that would result in an excise tax of $2,200 x the number of individuals receiving the notice.   Assuming round numbers of 250 people, that would add up to $550,000.

Perhaps an argument could be made to waive the excise tax if the Treasury Department determined that the employer did not know the failure existed and had exercised "reasonable diligence" to meet the notice requirements?  I've not researched but a complete miss on the basic timing rule would seem tough to argue reasonable diligence although the employer had no clue of the issue until now.  At the very least, hopefully the annual $500,000 cap on "unintentional failures" could apply?  Welcome any thoughts or suggestions on arguments on a waiver or possible reduction of excise taxes and how that normally plays out.  For example, does one have to submit a PLR requesting waiver due to reasonable cause and not willful neglect to get clear IRS response / waiver or is it possible to get relief for an "unknown failure" (See ERISA Outline 3B.644--5.b.1) without having to actually submit a PLR reasonable cause request?  Part of our issue here is needing to reach clear result and clear up for the buyer in the sale without leaving open issue and future audit risk.

In addition to the excise tax issues above, what if the employer is willing to concede the late notice was an "egregious" failure such that the freeze cannot take effect until everybody has at least 45 days notice?  For example, what if the employer gives everyone an extra month of benefits beyond the original freeze date to make up for the 22 days the notice was late?  It seems like that is possible under the current rules as an alternative to any argument the attempted freeze is completely ineffective?  And if the failure was truly "egregious" it seems like that extra benefit accrual is arguably required?   As  I understand the rules, however, giving folks the extra month of benefits would not eliminate the excise taxes as those  apply in addition to the potential for accrual of additional benefits?  See ERISA Outline 3B.666.   Seems that means you cannot simply "buy your way out" of the excise taxes (at least without some waiver by the IRS) in these situations by making up benefits over the missed notice period?

In this case, the extra month of benefits would only be ~$50,000 but the excise taxes may be $500,000.  Perhaps there is an argument the plan could stick with the original freeze date and avoid not having to give the extra month of benefits (i.e., they could argue the failure was not "egregious" under these facts) but the excise taxes still apply.  If they have to pay the excise taxes, the additional month of benefits is not that huge of a deal though.  Which brings me to our other question--can the plan just revoke, rescind, or otherwise completely ignore the prior 204(h) notice and attempted plan amendment / freeze as ineffective, give everybody the additional benefits that would have accrued through the rest of 2020, and thus avoid paying any excise taxes?  Is that possible or are they clearly stuck with the excise tax issue in all cases because of the attempted freeze?  If they went ahead and honored the additional benefits accruing during the last part of 2020 as if no freeze had been implemented, that should be significantly cheaper than the excise taxes due given the number of plan participants.  They could then go ahead and proceed with a termination of the plan quickly now before anybody accrues anything in 2021 and come out cheaper than paying the excise taxes.  That doesn't seem exactly right but they would much prefer to give extra amounts to participants than in excise taxes.  Thanks.

There is a lot here, but my experience is the IRS will never know, unless you tell them, or a participant sends a complaint to the DOL.  That doesn't excuse the late 204(h), but you should make sure the attorney explains risk/reward to the client.  

I have always struggled with this whole concept.  There are places that state a plan must provide a timely 204(h) notice in order for the freeze to be effective.  That implies, if no 204(h), then no freeze or accrual reduction can be effective.  However, if that is really true, why is there a stated excise tax for a late 204(h) notice?  How can a required timely notice be "late"? That implies the first rule has exceptions - yes, costly ones, but exceptions.  That begs the question, if the notices is late, does that mean the freeze is still effective?  How late can a notice be and still have an effective freeze?  I guess yours is a situation where the tax might be effective - but it is a pretty big smack.

Personal opinion is I think you would be relatively safe to give additional accruals for the extra 30 days.  Not sure what your plan provisions are, but the additional 30 days may not result in any additional benefits.  I know you said there were additional accruals, but you might want to closely examine the plan's provisions and confirm.  For example, if the plan had a 1000 hour rule, did anyone really qualify?  Just a thought.  If the IRS ever comes calling, you can show the notice was incorrect, but you rectified the situation.  

Definitely get an ERISA attorney involved so they can explain the risk/reward of their options.

Is this something you can file under VCP?  Maybe give an IRS agent, or ex-agent, a call and get an opinion without exposing the clients name.

You can do another amendment to freeze the plan with a date that is 45 days after the 204(h) notice was mailed. You should definitely not terminate the plan until this is corrected.  The PBGC will catch this in the audit and will make the plan calculate benefits through that 45 day date and make the plan pay out the difference.

Thanks very much for the responses and the thought about possibly getting the advice of an ex agent.  That's a great thought and will pursue but welcome any experience or advice from anyone else out there that has been through something similar.  It seems one of the big challenges here is that the pending transaction likely means the issue must be dealt with to the satisfaction of the buyer of the company--either with a clear fix or maybe with some broad and long indemnity--which sort of makes some of the usual risk / reward analysis a bit tougher and makes the question of qualifying for excise tax relief cricitical.  Wondering if anyone has experience in obtaining excise tax relief in this context or other thoughts?  Thanks.