IRS Puts Out Updated Compliance Aids

The Internal Revenue Service (IRS) has announced updated Web pages, checklists and fix-it guides to aid employers in operating their plans and correcting mistakes.

“A retirement plan needs regular care to keep it operating properly. Your plan’s care should include a regular review of your plan’s basic operations,” the IRS says. The agency offers one-page checklists for SIMPLE IRAs, SEPs, SARSEPs, 401(k) plans and 403(b) plans. Each checklist links to a Fix-It Guide with tips on how to find, fix and avoid each potential error.

The agency announced the Fix-It Guides for SIMPLE IRA and 401(k) plans have been updated.

A recently updated Web page on the IRS’ site focuses on what plan sponsors can do if they used the wrong compensation definition to calculate deferrals and contributions to participants’ SIMPLE IRAs. The agency says, generally, compensation means the sum of a participant’s wages, tips and other compensation subject to federal income tax withholding and elective deferral contributions the participant made to the SIMPLE IRA plan.

Plan sponsors should review the computations for the elective deferral contributions and employer contributions for all employees, and make sure they count all compensation (not just base compensation) in this review. Include bonuses, overtime, commissions and all other categories of compensation.

To fix the mistake, plan sponsors must make corrective contributions to employees’ SIMPLE IRAs equal to:

  • 50% of the employee’s elective deferral percentage under the plan times the excluded compensation (Note: unlike the correction for excluded employees, in this case the plan sponsor knows the participant’s actual salary deferral election); plus
  • the employer contribution required under the plan times the excluded compensation.

Plan sponsors must adjust the amounts contributed for earnings to the date of correction. If it isn’t feasible to determine what the actual investment results would have been, they may use a reasonable rate of interest, such as the interest rate used by the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator.

Several correction programs are available to fix the error. The IRS says, to avoid the error, plan sponsors should establish plan administrative procedures requiring an annual review of employees’ compensation.

Similarly, another updated Web page focuses on what to do if contributions to participants’ SEP-IRAs were miscalculated because the wrong definition of compensation was used.

The IRS also recently announced a guide to help retirement plan sponsors with reporting and disclosure requirements (see “IRS Issues Guide for Retirement Plan Reporting”).