Here are some of the types of issues that cross my desk and upon which I advise:
- An HR manager allowed a 10 percent employer contribution into the 401(k) using inaccurate Box 1 W-2 amounts;
- Another HR manager failed to automatically enroll new employees who were part of a recent company acquisition;
- A 401(k) plan failed its Average Deferral Percentage (ADP) tests since 2010 and still has not corrected for the failure;
- A non-profit allowed terminated executives to make an employee deferral into the 403(b) plan off the settlement proceeds they received when they signed a general release at termination;
- A group of what seemed to be four unrelated employers turned out to be part of a control group, making them a “single employer” for ERISA/tax purposes (even for Affordable Care Act group health plan purposes, but we won’t discuss the implications here); one member had offered a 401(k) plan its employees, but the other members offered no retirement plan to their employees.
When plan fiduciaries eventually unravel these problems, they must also analyze whether — to preserve the plan’s tax qualification — they may simply self-correct and avoid the review and scrutiny of (and filing and application fee to) the Internal Revenue Service or whether they must submit an application under the voluntary correction program (VCP) that is part of the Employee Plans Compliance Resolution System (EPCRS), Rev. Proc. 2016-8 (Jan. 4, 2016) requesting approval of the correction.
Typically, an employer may self-correct if plan issues are “insignificant,” an analysis that examines the administration procedures in place, type of error, participants and dollars involved, how many years the mistake occurred, the reason behind the mistake. “Insignificance” tends toward issues where there has been a failure to follow the terms of the plan, exclusion of eligible participants, and improper allocations of contributions. Where issues are “significant” (which will always include plan document failures), however, the employer should consider the VCP route. In addition, Employers may generally self-correct both significant and insignificant failures if errors are corrected shortly after they occur.
In efforts to ease the financial burden of filing under the VCP, effective February 1, 2016 (this week), the IRS will charge significantly reduced compliance fees for certain issues under EPCRS, which is the IRS’s program for correcting plan document, demographic, and operational failures that retirement plans experience. The newly-reduced fees (not retroactive for submissions prior to the February effective date) reflect the IRS’s desire to encourage employers to self-audit their plans to self-disclose to the IRS the compliance issues encountered and the corrections the employer takes. The IRS already discounts fees for certain plan failures (e.g., if the plan fails to pay required minimum distributions, loan failures, late adoption of certain good faith/interim/optional law changes, and non-amenders). Submitting through VCP allows the IRS and the employer to collaborate on the corrections, with the common goal and hope of preserving the plan’s tax-qualified status.
The chart below compares user fees (pre-February 1, 2016) under Revenue Procedure 2013-12, as amended, to the new user fees in effect starting this week:
Click here to view table.
What with self-correction always a possibility and lower fees when disclosure to and approval from the IRS is necessary, employers – and their plan fiduciaries — should seize the opportunity to identify and remedy plan failures.