Publication: ASPPA Plan Consultant
Volume/Issue: Fall 2016
Handling Client Errors:
Doing More Than Applying Bandaids to Benefits Boo-Boos
Ilene H. Ferenczy, Esq., CPC, APA
Everyone in this business knows that it is nearly impossible to flawlessly administer a retirement plan. The rules are too extensive, the regulations too numerous, and the issues too broad for perfection. Simplification projects by Congress and the Administration only lead to more complexity. In addition, the government is schizophrenic in its approach—wanting to encourage retirement savings on the one hand, and ruing the loss of tax dollars due to deferral of income on the other. The result is that all service providers to retirement plans face the need to fix errors on a nearly continuous basis for their clients. This article is meant to share some of the basic techniques to plan corrections that help the process move forward effectively and efficiently.
Tip #1: Get All the Facts Before Launching Correction Activities
One of the most common mistakes in handling plan corrections is to move forward immediately and without much consideration into the holistic approach of the correction process. This is part of our desire to be helpful and to assure our clients that all will be okay. We leap into action without thinking it through. However, it is critical that the practitioner get a clear and complete view of what is really going on before taking the path to corrections.
The best tool in your toolkit here is your curiosity. Ask questions, then ask more questions, then ask more questions. What the client thinks is relevant is not necessarily correct. She may be leaving important points out or putting issues that are irrelevant into the mix. Furthermore, remember the TV show, “House”? Dr. House, a diagnostician, used to say, “Everyone lies.” He’s correct. People hate looking stupid or at fault, and are prone—even subconsciously—to color the story to make themselves look better. By asking questions, you have a better chance of seeing inconsistencies and finding out nuances that you should know at the front end.
Tip #2: Take Time to Think it Through
The tendency to go quickly to the fix-it part of the process continues once you have obtained the facts. Before you can discuss corrections, you need to thoroughly analyze what you have and how one part may affect the others. For example, suppose that a client tells you that no top-heavy contribution was made. But, the facts tell you that the plan failed ADP testing and the plan sponsor fixed the problem by depositing a QNEC. Can the QNEC solve the top-heavy problem? Or, maybe there was another error that you need to fix with a contribution, and the corrective top-heavy contribution can fix the other error, too, thereby killing two birds with one stone.
If you do not thoroughly consider all the aspects of a case, you may find that correcting the error on which you are concentrating may cause another problem to arise. For example, suppose that the client comes to you with a mistaken allocation to a participant and you immediately decide to revise the allocation. However, because you did not think the entire situation through, you did not consider that correcting the allocation results in the plan failing nondiscrimination testing. By thinking through the entire process, you can examine and resolve not just the obvious problems, but those that may be more inchoate.
Last, spending time with your Sherlock Holmes hat on will help you think straight. Lots of times, you start a correction process with an idea in mind, and it is hard to dislodge that idea even when faced with contrary evidence. Giving yourself time may clear your mind and allow you to see the details that you missed on the first pass. Running a case by another person also helps with this. You would be surprised by how stating the facts out loud to someone else will help you see things more clearly.
Tip #3: Don’t Look for Miracles, But Be Creative
It is not unusual when discussing corrections with other practitioners to hear someone say, “I know a guy who …” and then proceed with a story about a miraculous result obtained through discussions with the IRS or DOL … a result that you know in your heart is either not what likely happened or is based on facts not in evidence.
When framing corrections, it is advantageous to understand what the IRS or DOL wants to achieve from a plan correction, what is acceptable to the relevant agency, and what is not acceptable. Revenue Procedure 2013-12, the basis of the IRS’s Employee Plans Compliance Resolution System (“EPCRS”), and the subsequent Revenue Procedures 2015-27 and 2015-28 discuss principles of correction, and outline preapproved fixes for many errors. On the DOL side, the Voluntary Fiduciary Correction Program (“VFCP”) gives similar indications of what the DOL looks for in correcting fiduciary breaches and prohibited transaction issues. These guidance items should always be your starting point. While you are not required to use these corrections, you need to be prepared to defend any alternatives as being appropriate to the error at hand.
Nonetheless, the procedures should not fully constrain one from considering other alternatives that might be acceptable. Thinking outside the box may be helpful in framing a correction that is more palatable to the client, while still acceptable to the government. Remember, however, that there is always risk in using a fix that is not preapproved, and consider whether a government filing is recommended even if the error may be self-corrected under the procedures.
Tip #4: Always Get Your Ideas Out First
Even though the IRS generally tries to help practitioners frame reasonable corrections in EPCRS, the reviewer is not as motivated to creatively help your client as you are. And, once an idea plants itself in the reviewer’s mind, it is harder to dislodge it and plant your own concept than it is to get your idea on the table first. Therefore, it is almost always best for you to get your correction method proposed before the IRS has the opportunity to suggest what it is thinking. In VCP, this is part of the submission materials. However, do not wait for an auditor to propose the correction in Audit CAP, the program that is used if the error is found during an IRS examination. Think it through, figure out the best reasonable approach for your client, and outline the options as you see them.
Even if you end up engaging in negotiations on the correction method, if you propose your way of thinking as an alternative to what the IRS has put forth, you will likely find that the compromise position is closer to your ideas than not..
On the VFCP side, remember that there are no negotiations or discussions, and no alternatives to the correction methods outlined in the procedure are acceptable. Therefore, you need to follow the VFCP instructions to the letter if you are to take advantage of that program.
Tip #5: Know When to Get a Lawyer Involved
At the risk of sounding like I’m hawking our wares, there are times when a lawyer’s assistance can be invaluable, and you should take advantage of those situations. Here are some of the things that lawyers can provide:
- Attorney-client privilege. While there are some other types of privileges for tax advisors, none is as broad as the attorney-client privilege. If there are reasons the parties want to make sure to protect the confidentiality of communications, then having an attorney is important.
- Review of closing agreement documentation. A closing agreement with the IRS is a contract. It should be reviewed by someone who looks at contracts for a living and knows how to make sure that they are binding on the parties.
- Pursuit or protection from litigation. If an error was made by a practitioner, then it is likely that the client will at least consider whether the practitioner is financially liable. Acting and communicating in a proper manner may reduce the risk of litigation or at least protect the practitioner to the extent possible. If your plan sponsor client is considering litigation against a prior TPA or another service provider, you should take any necessary action to help preserve the right to make a claim against the responsible party. In particular, the sponsor should be watching the statute of limitations while the correction process is pending to be sure that it is not expiring, thereby eliminating any possible claim. Finally, if you are the one who has made the error, your lawyer should assist you in solving the problem without making admissions that can be used against you in court or increasing your potential liability, while preserving your errors and omissions coverage.
- Getting cooperation of the parties. Unfair though it may be, sometimes having an attorney is valuable to get everyone to do what is needed. There are those who just cooperate more readily if there is a lawyer’s voice in the room.
Tip #6: Don’t Do What You Don’t Know
The worst thing you can do in dealing with plan issues is to make additional errors. These kinds of errors may be technical in nature, such as failing to properly repair the problem or creating other violations. You could also make a mistake by proposing or accepting a correction that does not optimize the resolution for your client. For example, you could agree unknowingly to an IRS-proposed correction that costs the client more than other acceptable alternatives. That makes the client’s problem your problem … not a result that we would recommend.
These are not the only tricks of the trade, but following these suggestions can go a long way to increasing the success of fixing client errors. Think things through, plan carefully, know what you are doing, and get help if you need it.