Below are some examples of plan document errors. If a 401(k) plan sponsor has a plan document error, the plan sponsor should work with their 401(k) TPA or 401(k) provider to resolve the situation. In many cases, it is also necessary to engage an ERISA attorney.
Example 1
In the fall of 2010, ABC Company’s attorney sends them an amendment to update the ABC Company 401(k) plan for the final HEART/WERA regulations. The attorney clearly tells ABC Company that they need to adopt the amendment by December 31, 2010, but the amendment ends up unexecuted in someone’s desk drawer only to be discovered in December 2011. The ABC Company 401(k) Plan has 73 participants.
• There is no self-correction for plan document failures.
• ABC Company must pay a penalty and file under VCP.
• If this is the only failure, there is a reduced penalty of $375, and a streamlined filing is available.
Example 2
In 2000, John Smith sets up a 401(k) with a large brokerage firm and correctly adopts their prototype document. The brokerage firm sends John form letters regarding the required GUST and EGTRRA restatements; however, John does not realize action is required, and he does not keep or execute the restatements. In 2011, John Smith’s 401(k) plan is selected for IRS audit. John Smith’s plan has fewer than 20 participants.
• There is no self-correction for plan document failures, and because the issue has been caught on audit, John Smith is not eligible to file under VCP.
• John Smith will need to resolve this issue through Audit CAP.
• The sanction charged will be negotiated between John Smith and the IRS. The amount will be a percentage of the amount that the IRS could collect if the IRS disqualified the plan.
Example 3
In 2000, Acme sets up a 401(k) plan with a national provider and correctly adopts their prototype document. The national provider sends Acme the required GUST restatement in 2003, but Acme does not execute the restatement and cannot even locate the document. In 2010, Acme moves its 401(k) plan to a new provider who does an EGTRRA restatement and files the EGTRRA restatement for an IRS determination letter. When the IRS reviews the determination letter application, the IRS requests the GUST restatement and Acme cannot produce it. Acme’s 401(k) plan has 106 participants.
• Adopting the EGTRRA restatement without solving the missing GUST restatement does not fix the problem.
• The sanction is calculated under Section 14.04 of Revenue Procedure 2008-50, based upon the missing document and the number of participants.
• The sanction would be $15,000. The fee would have been $5,000 if Acme had proactively filed under VCP instead of the IRS finding the error.
Example 4
In the spring of 2010, XYZ Company’s 401(k) provider sends them the EGTRRA restatement with instructions to adopt the EGTRRA restatement no later than April 30, 2010. Due to staff turnover, it is discovered in December 2010 that the EGTRRA restatement was not adopted. The XYZ Company 401(k) Plan has 223 participants.
• There is no self-correction for plan document failures.
• XYZ Company must pay a penalty and file under VCP.
• The IRS VCP fee is $5,000. However, if the VCP filing is completed by April 30, 2011, there is a reduced penalty of $2,500.
Example 5
In 1999, ABC Company adopts a 401(k) plan and selects a national provider to administer its 401(k) plan. In 2003, ABC Company fires the national provider and retains its CPA to do the 401(k) plan’s Form 5500. ABC Company does not retain anyone to maintain its 401(k) plan document. In 2011, ABC Company decides to move its 401(k) plan to a different 401(k) provider who discovers that the plan documents have not been updated since 2003. ABC Company’s 401(k) plan has 501 participants.
• There is no self-correction for plan document failures.
• ABC Company must pay an IRS VCP fee and file under VCP.
• The IRS VCP fee is $8,000.