It should be noted that all five of these amendments are also available under VCP. In fact, the streamlined VCP schedule 9 is made for the first four of these amendments.

What five qualification errors does EPCRS permit a plan sponsor to correct under SCP by way of a plan amendment?

A plan sponsor may use a retroactive corrective plan amendment to correct the following qualification errors under SCP:

1. Making a hardship distribution from a plan that does not include the hardship distribution option.
2. Making a participant loan from a plan that does not include the loan option.
3. Allowing an otherwise eligible employee to participate in a plan before he/she has satisfied the plan’s eligibility conditions.
4. Allocating a contribution to correct an allocation made in violation of the Code §401(a)(17) compensation limit.
5. Correcting an ADP failure, in whole or in part, by making a qualified nonelective contribution (QNEC) that is not otherwise available under the plan.

With respect to any retroactive corrective amendment adopted under SCP, EPCRS requires that the amendment comply with the requirements of Code §401(a), including §§401(a)(4), 410(b) and 411(d)(6). Each correction also includes certain conditions specific to the corrective amendment.

With respect to a plan that makes a hardship distribution or a participant loan from a plan that does not include such provisions, what conditions must a plan satisfy to correct with a plan amendment?

A plan that has an operational failure of making a hardship distribution or a participant loan under a plan that does not include such provisions may be corrected with a retroactive corrective amendment. The amendment would retroactively authorize hardship distributions or loans, as applicable. However, the plan must satisfy these conditions:

1. The amendment satisfies Code §401(a) at the time adopted;
2. The plan as amended would have satisfied the qualification requirements of Code §401(a), including the hardship requirements under Code §401(k) and the loan requirements under Code §72(p), had the amendment been adopted when the hardships or loans were first made; and
3. The hardship distribution or loan options were current and effectively available to a sufficient group of NHCEs to satisfy the nondiscrimination requirements of Treas. Reg. 1§.401(a)(4)-4. EPCRS does not specifically impose this as a condition but in the examples illustrating the correction, the IRS indicates that the hardship and loan were currently and effectively available to a group of employees that satisfied the nondiscrimination requirements.

With respect to the early inclusion of an otherwise eligible employee, what conditions must a plan satisfy to be able to correct with a plan amendment?

The plan may be retroactively amendment to change the eligibility or entry date provisions to provide for inclusion of the ineligible employee to reflect the plan’s operations. The amendment may change the eligibility or entry date provisions with respect to only those ineligible employees that were incorrectly included, provided:

1. The amendment satisfies Code 401(a) at the time adopted;
2. The amendment would have satisfied Code 401(a) (including coverage) had the amendment been adopted at the earlier time; and
3. The employees affected by the amendment are predominantly nonhighly compensated employees (NHCEs).

Example. Corporation X’s plan maintains a 401(k) plan with one year of service and age 21 eligibility conditions. For 2011, X permitted 1 highly compensated employee (HCE) and two NHCEs participate in the plan immediately. Since the plan has already performed the ADP test for the plan year and made corrective distributions, the plan does not want to correct by returning the deferrals to the ineligible employees and re-testing. Using the amendment option under SCP, X may adopt a retroactive amendment to allow only the three ineligible employees in immediately to conform the plan to its operation. The amendment is permitted because the affected employees are predominately NHCEs.

Example. Assume the same facts as in the previous example except the make-up of the ineligible employees is 2 HCEs and 1 NHCE. The amendment option is not available because the affected employees are not predominantly NHCEs. Instead, the plan will need to correct by returning the excess allocations to the employees and re-testing the plan.

With respect to a plan that makes an allocation in excess of the Code §401(a)(17) limit, what conditions must a plan satisfy to correct with a plan amendment?

A plan that allocates a contribution in excess of the 401(a)(17) limit may correct the operational error under the “contribution correction method" and if necessary, adopt a retroactive corrective amendment. Under this correction method, the plan sponsor contributes an additional amount to each participant (excluding the employee for whom these was a 401(a)(17) failure) who received an allocation for the plan year of the failure, and amends the plan (if necessary) to provide for the additional allocation. The amount contributed for a participant is equal to the employee’s plan year compensation for the year of the failure multiplied by a fraction, the numerator of which is the improperly allocated amount on behalf of the employee with the largest improperly allocated amount, and the denominator of which is the 401(a)(17) limit for the applicable year. The plan adjusts the additional contribution for earnings. Note: Many plan sponsors probably would decline to make additional contributions, and instead use the “reduction of account balance correction method." The excess allocation, depending on the plan terms, either would be reallocated to the other participants or placed in a suspense account and used to reduce future employer contributions.

Example. Employer X maintains a money purchase plan with a 10% contribution formula. For 2011, Ben earned $300,000 and inadvertently was provided a $30,000 allocation. X decides to use the retroactive corrective amendment option to increase allocations for the other participants. Accordingly, the plan amends the plan retroactively to increase the contribution percentage from 10% to 12% ($30,000/$250,000). X makes an additional contribution of 2% (plus earnings) for each participant.

With respect to a plan that fails the ADP test and the plan does not include a provision permitting QNECs, what conditions must a plan satisfy to amend the plan retroactively to provide for QNECs?

The QNEC must satisfy the regulatory requirement that the QNEC be 100% vested when contributed to the plan. In other words, the plan may not use forfeitures to make the QNEC contribution.

Must a plan that adopts retroactive corrective amendment under SCP file for a determination letter for the plan?

EPCRS gives a general rule requiring a determination letter submission:

Except as provided in §6.05(1), in the case of any correction of an operational failure through plan amendment under SCP that is permitted under §4.05(2) …, a plan sponsor must submit a determination letter application for the plan, including the corrective plan amendment, during the plan’s next on-cycle year, or if earlier, in connection with the plan’s termination.

§6.05(1) has exceptions to this general rules:

Notwithstanding any other part of this §6.05, a determination letter application is not required and may not be submitted with the VCP submission if:

1. the correction by plan amendment is achieved through
   1. the adoption of an amendment that is designated as a model amendment by the Service or
   2. the adoption of a prototype or volume submitter plan with an opinion or advisory letter as provided in Rev. Proc. 2012-6, 2012-1 I.R.B. 197, on which the Plan Sponsor has reliance (or is treated as having reliance …), or
2. the failure corrected is a demographic failure.

Therefore, if a plan sponsor incorporates its retroactive corrective amendment within its approved prototype or volume submitter document, the plan sponsor not only does not need to submit a determination letter application with respect to the corrective amendment, the IRS prohibits such an application. However, if the plan is on an individually designed plan document, the plan sponsor will need to include the corrective amendment as part of its next determination letter application.

We will further discuss 401(k) plan corrections in our live 401(k) Plan Workshop. We will also provide sample completed VCP applications to attendees. See below for details.

EPCRS Checklist. The IRS has provided correction methods for many different qualification errors. However, locating the correction methods in the 178 page procedure can be difficult. Accordingly, we have created a checklist (section and page references) that will assist practitioners in easily locating the correct method in the procedure. The checklist also includes a link to the correction procedure. We are providing the checklist to all of our Technical Update subscribers (as of April 1, 2013). The free Technical Update email service provides timely, practical explanations of challenging issues and new guidance. To subscribe go here: www.relius.net/Login/NewUser.aspx.

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Upcoming Web Seminars
Deferral Deposits, 403(b) Plans Corrections, Plan Amendments, 409A, IRS Form 5330, 457(b) Plans, and more
Visit our Web site for more details and to register online, here: www.relius.net/Events/events.aspx?Web.

Form 5500 Workshop 2013, April – June
One of the primary purposes of EFAST2 was to make IRS and DOL enforcement more timely and effective. Every indication suggests that the government is following through on its promise. If you have wondered why the IRS or DOL is auditing or investigating your clients’ plans, you probably need look no further than the answers and information included on the Form 5500. Visit our Web site for details and to register online here: www.relius.net/events/events.aspx?Seminar.

401(k) Plan Workshop 2013, April – June
This year’s 401(k) Plan Workshop will discuss the likely changes Tax Reform will have on retirement plans. Other topics include: 401(k) plan corrections; in-plan Roth transfers; retroactive amendments (11(g) amendments) to avoid plan disqualification; tax consequences of plan disqualification; identifying, testing amending benefits, rights and features, current developments; and an interesting explanation of what the IRS likely will do with the information they obtained in their recent surveys of 401(k) plans. Visit our Web site for details and to register online here: www.relius.net/events/events.aspx?Seminar.

Added Value! – Attendees of each Workshop receive a complimentary registration for a Web seminar (recorded) – a $190 value.

• Form 5500 Workshop attendees receive a complimentary copy of responses to 40 FAQs submitted by attendees of Relius Education’s Schedule C Web seminars.
• 401(k) Plan Workshop attendees receive:
  • a sample completed VCP application package for an interim (or optional) amendment failure
  • a sample completed VCP application package for a nonamender failure, and
  • a retroactive amendment package.

Save the Date:
Chicago Advanced Pension Conference – August 28-30, 2013
Just for ERPAs Workshop, Chicago IL – August 27, 2013
Event details and online registration will be available in June on our Web site: www.relius.net/Events/seminardetail.aspx?CID=26172