Do you sponsor a qualified retirement plan? If you’re a tax-exempt or governmental employer, do you sponsor a 403(b) plan? If you answered yes to either of these questions, you know that despite having the best administrative procedures in place, it is easy to make mistakes with respect to the plan. If the IRS were to catch these mistakes on audit, it has the potential to disqualify the plan. Fortunately, the IRS has the Employee Plans Compliance Resolution System (“EPCRS”) in which plan sponsors may correct errors voluntarily—sometimes with an IRS filing and reduced penalties, and sometimes with no filing at all.
The IRS recently updated the EPCRS with the release of Revenue Procedure 2013-12 (“the Procedure”). The Procedure is effective April, 2013, but plan sponsors may follow its procedures immediately. The Procedure gives plan sponsors the ability to correct a greater variety of plan errors than they could in the past. It also clarifies correction methods described under prior versions of the EPCRS. Administratively, the Procedure proscribes new forms to file with the IRS and changes some of the fees. Overall though, the Procedure gives plan sponsors a great opportunity to correct plan document and administrative failures before the IRS discovers such errors on audit. We will briefly describe of the major changes or additions in the Procedure below.
Revised Correction Methods
- 403(b) Plan Corrections. Perhaps the biggest change is that the EPCRS now is available to correct errors in 403(b) plan documents. Prior versions of the EPCRS generally allowed corrections only of certain operational errors, but not documentation errors. While the correction procedures for 403(b) plans generally are similar to those used to correct qualified plan errors, plan sponsors should be careful because some corrections could be significantly different due to the different natures of 403(b) and qualified plans (e.g., the need of 403(b) plans to coordinate with their vendors).
- Code Section 436 Restriction Errors. If a defined benefit plan’s funded status falls below certain thresholds, Code Section 436 imposes restrictions on the accrual and payment of benefits. The Procedure explains how to correct errors arising from violations of Code Section 436. In certain cases, a plan sponsor may need to make contributions to the plan to make it whole.
- Correction of Matching Contribution Errors. A common mistake we see is that plan sponsors failed to implement matching contributions. The correction method typically has been for the plan to make a qualified non-elective contribution (“QNEC”). In general, QNECs are required to be fully and immediately vested. They also are subject to certain distribution restrictions. The Procedure allows corrective matching contributions to be subject to the plan’s vesting and distribution rules.
- Correction of ADP/ACP Failures. The Procedure states that for purposes of correcting a failed ADP or ACP test, the amount used to fund the QNEC must satisfy the definition of QNEC in Treas. Reg. Section 1.401(k)-6. That means that amounts in the plan’s forfeiture account may not be used to correct ADP and ACP test errors.
- Locating Missing Participants. In August of 2012, the IRS suspended its letter forwarding program that assisted plan sponsors with locating missing participants. The Procedure states that if a correction requires distributions to missing participants, full correction will not be required with respect to those participants so long as the plan sponsor takes “reasonable” steps to locate the missing participants.
Procedural and Administrative Changes
- New Forms and Schedules. The Procedure requires plan sponsors to submit a new Form 8950 and Form 8951 when submitting written correction filings to the IRS. In addition, the Procedure creates new schedules to be included with such filings, depending on the type of error the plan sponsor is correcting.
- Fees. The fees under the Voluntary Correction Program (“VCP”) generally are unchanged, ranging from a low of $750 to a high of $25,000, depending on the number of plan participants. If the IRS discovers an error on audit, the fees under the Audit Cap program have increased, with a new low of $2,500 to a new high of $88,000.
- New Address. VCP submissions now must be sent to the IRS office in Covington, KY, rather than Washington, D.C.
- 457(b) Plan Correction Filings. The Procedure states that the IRS will accept submissions related to governmental employer sponsored 4579b) plans outside of the EPCRS, but through procedures similar to those under the EPCRS. The IRS generally will not review 457(b) plan filings from tax-exempt employers.
These items may look daunting, but the lesson, as always, is that it is better to be diligent with respect to plan documentation and administration rather than to let things slide and create a mess that will need to be cleaned up later. Still, mistakes will happen, and the new EPCRS provides plan sponsors with a greater opportunity than ever to correct these mistakes at a fraction of the cost of dealing with them on audit. Accordingly, plan sponsors should consider reviewing or auditing their qualified plans or 403(b) plans to determine whether they should take advantage of these new procedures.