During the event, “EPCRS: Correction of 401(k) Plan Mistakes,” co-presenter Avaneesh Bhagat, manager, Voluntary Compliance Group in the IRS’s El Monte, California, office, discussed common 401(k) plan failures. “Plan sponsors need to take a holistic view of these corrections,” he said. “They need to find the errors, fix them and avoid them going forward.”
One common mistake, he said, is the failure to do a timely update of plan documents. “Legislation can make for constant change to your plan documents and plan sponsors sometimes miss the deadlines for making such changes.”
Other failures may occur because the plan does not operate in accordance with plan terms such as compensation, matching contributions, ADP/ACP testing, eligible employees, the 402(g) limit, top heavy contributions, hardship distributions or loans.
To prevent errors from happening, Bhagat recommended plan sponsors regularly review plan records such as the original plan document, amendments, adoption agreements, IRS opinion or advisory letters, IRS determination letters, minutes or resolutions from the board of directors, and the summary plan description.
“Plan sponsors need to figure out where the gaps are and then amend these documents to reflect compliance with current legislation,” he said.
Bhagat also recommended using the standard of maintaining plan document records for an extended period. “Keep plan documents for many years going forward.”
He also said plan sponsors can do a better job of identifying and avoiding mistakes related to plan operation by making sure all those involved with administration of the plan are familiar with the terms of the plan. One example Bhagat cited was making sure the payroll department knows the definition of compensation used for determining elective deferrals.
Bhagat pointed attendees to the IRS’s “Fixing Common Plan Mistakes” webpage, which contains links to helpful information about the Employee Plans Compliance Resolution System (EPCRS), 403(b) plans, ADP/ACP testing, plan amendments, automatic enrollment, compensation, contributions/elective deferrals, distributions, forfeitures, loans, safe harbor 401(k) plans, self correction, SIMPLE IRA plans, spousal consent, terminating plans, top heavy issues and vesting.
Forum co-presenter Stephanie Bennett, voluntary compliance program coordinator for the IRS’s Woodland Hills, California, office, discussed topics such as updates to the EPCRS and revenue procedures. Bennett reminded attendees that the EPCRS consists of three correction programs: the Self-Correction Program (SCP); the Voluntary Correction Program (VCP); and the Audit Closing Agreement Program (Audit CAP).
“The goal is to preserve tax-deferred benefits for participants of qualified retirement plans, tax-sheltered annuities, SEPs, SARSEPs and SIMPLE IRAs,” she said.
Bennett also reviewed that as per IRS Revenue Procedure 2013-12, which replaced the older 2008-50 procedure, full correction for plan errors includes all taxable years, whether or not the taxable year is closed. “This means that the plan sponsor’s proposal for correction should address all of the years where the failure is present.”
She also noted that under procedure 2013-12, “The correction method should restore the plan and its participants to the position they would have been in had the failure not occurred. The correction should also be reasonable and appropriate for the failure.”
Procedure 2013-12 was considered generally effective as of April 1, 2013, Bennett said, and changes from it included:
- Updated correction principles for 403(b) plans to reflect the written plan requirement and other aspects of final 403(b) regulations;
- Revisions to the submission procedures founder the VCP such as: filing applications with Kentucky instead of Washington, D.C.; use of IRS Forms 8950 and 8951; and availability of the model Appendix C compliance statement; and
- Other changes, including those that affect 401(k) plans.
With regard to erroneously excluded employees, Bennett said updates now generally provide that matching contributions owed to a participant may be made as a corrective employer matching contribution instead of a qualified nonelective contribution (QNEC). In addition, a corrective employer matching contribution, unlike a QNEC, would be subject to the plan’s relevant vesting schedule. On a related note, Bennett added that the updates “now formalize that a QNEC cannot be funded by plan forfeitures.”
Bennett also reminded attendees that as of August 31, 2012, the IRS discontinued its letter forwarding program as a method of searching for lost retirement plan participants. Procedure 2013-12 lists some methods that can be used instead, which include a commercial locator service, a credit reporting agency, Internet search tools or a non-IRS letter forwarding program. More details about the last option can be found in Revenue Procedure 2012-35, she said.
A copy of the slide presentation used for the phone forum can be downloaded here.