We have an employer who failed to list a part-time employee on the census form and only listed her when she became a full-time employee. In completing the 2001 plan valuation, we have determined this employee was eligible to participate in the plan in the 2000 plan year.

We immediately instructed the employer to correct this defect of excluding an eligible employee under the EPCRS Self-Correction, by depositing to this employee's account a make-up contribution for 2000 plus earnings based on her 2000 compensation. The employer made the contribution in a timely manner in 2002.

The questions:

Because this is a money purchase plan, does the discovery of this excluded eligible employee cause the employer to now have a funding deficiency for the 2000 plan year because the required contribution (i.e., the newly discovered employee's) was not made by the funding deadline for 2000?

If yes, does the fact that the employer corrected the failure under EPCRS override, waive or eliminate the funding deficiency caused by the discovery of the excluded eligible employee?

Does the excise tax imposed by Code section 4971 still apply and the employer is required to file a Form 5330? If yes, does the employer file a 2000 Form 5530 to report the funding deficiency?

Under Rev Proc 2002-47, Section 6.07 (Matters subject to excise taxes) in general stipulates that an event for which there would be imposed other taxes aside from those which arise from disqualification (e.g.-excise taxes for failure to meet 412 funding), the error can be corrected under the EPCRS but, generally, any excise taxes or income taxes associated with the correction will still apply.

Therefore, I would have the client file a Form 5330 and pay the appropriate excise tax. As far as late filing penalties go, I am not sure whether they would waive them or not.