We are a small company with just two employees - one FT, one PT. A TPA completed our 5500 and in the process they reviewed our plan document and determined the PT employee, who was less than PT for 3 years, was actaully eligible for contributions. What happened is I asked Vanguard to make the plan matching (put in 3% to get 6%) and available to FT employees. The plan was established before the employee was even hired or prior to us even thinking we'd be hiring naother employee. Vanguard said no problem they'll send a document all I need to do is sign it and return it. I did that and made the mistake of not reviewing it. I have no background in HR so it is all greek to me. Turns out they did not put any of the details I asked for and it immediately vested all employees regardless of hours worked. Now we are faced with how to handle this. The employee said they are willing to sign something waiving participation because he did not expect, nor would ever expect to participate as a PT employee and further he has his own Roth account he contributes to. The business' benfits package clearly states the matching contribution policy and the employees contract clearly states he is not a benefitted employee. He has been an employee since 2004 and worked less than PT for all years except 2007, 08.

What are our options?

When you execute a plan document, this becomes a binding agreement subject to all the rules of ERISA. Unfortunately, there is nothing you can do but a prospective amendment to be applied to future hires. Once a document is signed and communicated to employees, this creates protections that cannot be eliminated; regardless of the intent of the employer.

You can try VCP, but that will likely prove more expensive that those amounts you are attempting to save. Even then, the IRS will not likely allow you to do it.

Thanks. I think the gray area, at least for me, is that the affected employee never expected the benefit - in fact they understood, as a non FT employee, they were not eligible despite what the plan on file said.

How much would a VCP run typically? What costs are involved in that?

If we then eliminate the employees ability to participate effective 1/1/09 are we facing potential labor issues?