Publication: 401(k) Advisor
Volume/Issue: Vol. 23, No. 7, July 2016
The Latest in Plan Corrections
Ilene H. Ferenczy, Esq.
As we all get more sophisticated in our handling of qualified retirement plans, we also must become more and more knowledgeable about how plan errors are corrected. Part and parcel of that development on a practitioner side is the development by the IRS and the other regulatory agencies of correction opportunities.
This article will discuss two areas in which the IRS has taken the laboring oar to provide practitioners with a means of helping their clients keep their plans in compliance.
Whoops! Did I Forget to Restate My Plan?
Assuming that you have not been hiding in a cave for the past two years, you know that defined contribution preapproved documents needed to be updated for the Pension Protection Act of 2006 (“PPA”) and later guidance by April 30, 2016. But what if you hear this:
“My prior TPA didn’t tell me I needed to restate my plan!”
“I know I have that document somewhere but neither I nor anyone I know can find it anywhere!”
“My advisor told me that I didn’t have to do that, because that law didn’t change my plan at all.”
For whatever reason a plan was not restated (or that the plan sponsor cannot find any proof of any restatement), that problem needs to be corrected, and the sooner the better. The IRS mandates that document problems be corrected through the Voluntary Compliance Program (VCP) that is part of the Employee Plans Compliance Resolution System (EPCRS). This program requires that the plan sponsor file certain documents and information with the IRS.
The IRS is further encouraging the repair of the failure to restate in two different methods.
Isolated Instance of Failure to Restate
EPCRS Section 12.03 makes correction of amendment failures relatively easy and inexpensive to correct. First, there is a checklist for nonamenders, IRS Schedule 14568-B. (Do not use Schedule 14568-A, which is only for interim amendments.)
Second, the IRS procedures provide that, if the correction is made within 12 months of when the amendment should have been adopted, the VCP fee is half of the normal fee. Even better, the IRS reduced the VCP user fees in 2016 for most categories. If the plan at issue has fewer than 20 participants, the normal VCP fee is $500, and the reduced fee to resolve the nonamender is $250. The highest fee level for the largest plans (i.e., those with more than 10,000 participants) is normally $15,000, but is $7,500 for a nonamender fixed within 12 months.
Third, the IRS reiterated the nonamender submission rules and provided a type of cookbook for the VCP filing. That soft guidance can be found here on the IRS’s website: https://www.irs.gov/retirement-plans/vcp-submission-kit-failure-to-adopt-a-new-pre-approved-defined-contribution-plan-by-the-april-30-2016-deadline
The decision to do a nonamender filing under VCP is a no-brainer when one considers that failing to have an up-to-date plan can subject the plan to disqualification. Furthermore, it’s a relatively sure thing that, if the plan is audited, the IRS will find the error. While the IRS will almost always give an audited plan an opportunity to preserve its qualification by fixing the error and paying a sanction, the cost of that process is always significantly more expensive than fixing things up front. So just do it.
Mass Submission for Nonamenders
The IRS announced a new plan to help service providers fix a block of plans that were not timely amended. The IRS describes what it calls the “Umbrella Program” on its website, here: https://www.irs.gov/Retirement-Plans/New-Program-Allows-Providers-of-Pre-Approved-Plan-to-Correct-Missed-Deadlines. Under the program, you need to have at least 20 affected plans that need correction. There is no requirement that the failure to amend be due to a systemic error at the service provider’s firm or that there be any common cause or element between the plans. It is simply a way for a service provider to deal with many problem plans at once.
Under this program, the service provider may file for all its clients’ affected plans if it:
- Obtains affirmative agreement by the plan’s adopting employer to participate in the program;
- Certifies that the affected plan sponsors previously timely adopted the plans’ EGTRRA restatements in relation to the amendment cycle before the current cycle (or previously had that failure resolved under the IRS VCP program);
- Certifies that the affected plan sponsors have now adopted the PPA restatement;
- Provides the IRS with a letter outlining its proposal for resolution of the affected plans;
- Pays a user fee; and
- By the later of May 1, 2017, or 120 days after the IRS executes the closing agreement, provides a final list of affected employers and pays any additional fees.
It would not be unusual if some of the 20 restatement failures are due to clients who are nonresponsive. In that case, however, it is possible that these same dawdlers will continue to fail to respond to a practitioner’s solicitation for this program. As there must be 20 plans to take advantage of this program, a practitioner whose initial solicitations to nonresponsive clients produce fewer than 20 plans may be caught in a conundrum: should we file the regular VCPs for the clients who responded or should we wait to see if we can get to the 20 client minimum for the Umbrella filing? It may be the better part of valor to go forward to protect the more responsive clients through VCP than to dawdle while awaiting the slowpokes to finally take action, particularly if most of those plans have fewer than 20 participants.
The fees under this Umbrella Program are:
- $5,000 for the first 20 plans (which amounts to $250 per plan); plus
- $250 for each additional plan, up to a maximum of
- $50,000 total (which will kick in when there are more than 250 nonamenders being corrected).
The IRS advises that the $5,000 minimum will go up to $10,000 after April 29, 2017. So, if you are going to use this program, do it now.
A quick review of these fees reflects that plans with fewer than 20 participants do not recognize any relief in their user fees under this program unless the number of plans being repaired exceeds 250. Therefore, a sponsor of relatively small plans will likely be at least as well off from a user fee perspective in the individual program as the plans would be in the Umbrella procedure.
How Do I Fix This if VCP Is Unavailable?
Every so often, a service provider comes across a problem that is a tax issue and not a qualification issue. With very few exceptions, EPCRS is unavailable if there is no qualification failure. Therefore, historically, there have been situations in which there is no avenue for correction.
The IRS has initiated a program that is separate from EPCRS and is designed to assist in these tax-but-not-qualification issues. The first requirement to entering this program is that you cannot be able to resolve the issue in EPCRS. So, this is not an alternative to EPCRS, and you cannot use it to find a solution that you like better than the one that the VCP person gave you.
This new program, called the Employee Plans Voluntary Closing Agreement Program or VCAP, is discussed on the IRS website at https://www.irs.gov/Retirement-Plans/Employee-Plans-Voluntary-Closing-Agreements. VCAP is much less structured than EPCRS. Procedurally, a practitioner or plan sponsor approaches the IRS with tax-related issues involving the qualified plan, and suggests a reasonable correction. But, at heart, VCAP is something of a mix of the EPCRS-type procedures and those of the Audit Closing Agreement Program, which is used when errors are found on audit. While it is considered to be a voluntary process, and the IRS is predisposed to help resolve problems reasonably and with less expense than full taxation, VCAP participants are required to make full correction and to pay a negotiated fee or sanction to the IRS. Therefore, the person submitting the issue must be prepared to negotiate with the IRS about the ability to resolve the identified issue, the method by which that resolution will take place, and the amount of the sanction that must be paid.
The IRS will want some showing that the plan sponsor is willing to work with the IRS to resolve the matter, and that this program is in the best interests of both the plan and the IRS. The IRS also wants to be assured that the problem was unintentional, and that the federal government will not be disadvantaged by entering into the agreement. Finally, the IRS needs to believe that the plan sponsor is willing to do what is necessary to provide the relevant facts and documentation as well as pay the sanction to resolve this problem. In other words, the IRS wants to see a commitment that the sponsor will work with it to solve the issues involved.
To initiate a VCAP, the plan sponsor or representative must send a letter to the IRS office in El Monte, California, that includes:
- An explanation of the problem, including how and why it occurred, the number of people affected by the problem, and the amount of contributions, distributions, or other transactions affected by the problem.
- An explanation of how the plan sponsor proposes to correct the problem;
- Calculations of the tax, interest, or penalties that would normally be payable, and an explanation of how those were calculated;
- Any calculations of the revised tax or correction of the errors proposed in the letter; and
- The proposed sanction, with an explanation justifying the amount.
A submission may be made on an anonymous basis, as with EPCRS. The elements of the submission are a little different.
The IRS has indicated that cases that have both tax issues unresolvable in EPCRS and qualification issues can work with the IRS to deal with both under the VCAP, something which may not be permissible under EPCRS.