Tag Archive for: EPCRS

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Governmental 457(b) Plans and Corrections

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 “Are there any guidelines for correcting governmental 457(b) plan errors?” 

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Pennsylvania is representative of a common inquiry related to correcting governmental 457(b) plan errors.

Highlights of Discussion

Yes, there are.  The IRS gives a great deal of leeway to governmental 457 plans to self-correct many errors following the guidelines in its Employee Plans Compliance Resolution System (EPCRS) contained in Revenue Procedure 2021-30.

For a general summary, please see the IRS’s website guidance 457(b) Plan Submissions to Voluntary Compliance.  Note the section on “Governmental plan sponsors can self-correct.”  There is no IRS filing or fee associated with self correction, but the sponsoring entity should maintain adequate records to demonstrate it properly corrected the error in the event of a plan audit.

Here are the basics steps to self correction:

  1. Make any necessary corrections to put the participants in the position they would have been in if the error had not occurred.
  2. Document the steps you took to correct the error.
  3. Adjust your administrative procedures, if necessary, to make sure the mistake does not happen again.

Any reasonable and appropriate self-correction method described in Section 6 of EPCRS may be used.

Conclusion

The IRS has included correction principles in its EPCRS for 457(b) plan sponsors.  Governmental 457(b) plan sponsors have the added ability to self-correct many errors.

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Oops … How to fix switched contributions

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“My client initially elected to make designated Roth contributions to her 401(k) plan and a few years later switched her election to pre-tax elective deferrals. We just discovered the employer is still treating her deferrals as designated Roth contributions. Is there a way to retroactively treat these amounts as pre-tax salary deferrals?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to designated Roth contributions in 401(k) plans.

Highlights of the Discussion

Yes, there is a way of correcting the situation where an employer has failed to make the correct type of salary deferral to a 401(k) plan (i.e., pre-tax/designated Roth, or vice versa) based on the participant’s deferral election. It will require some correcting of IRS tax forms and the employer’s participation in the IRS’s Employee Plans Compliance Resolution System (EPCRS) program. Please refer to Fixing Common Mistakes-Correcting a Roth Contribution Failure and Revenue Procedure 2019-19.  

Generally speaking, an employer in this situation can correct the error by executing three steps.

Step 1: Transfer deferrals

The employer transfers the erroneously deposited deferrals, adjusted for earnings, from the designated Roth account to the pre-tax salary deferral account. The employer must ensure the information on IRS Form W-2, Wage and Tax Statement, for the participant is correct (i.e., reflecting the correct contribution type). That may involve the employer filing a corrected Form W-2 with the IRS showing the previously misidentified designated Roth contributions as pre-tax salary deferrals.

Step 2: Follow EPCRS or Audit CAP

Since the error represents an operational failure on the plan sponsor’s part, the sponsor should follow plan correction procedures outlined in the IRS’s EPCRS program. Depending on the circumstances, it may be possible for the employer to self-correct the error, without penalty or a formal filing with the IRS. Otherwise, a sponsor can file with the IRS under the IRS’s Voluntary Correction Program (VCP). If the error was discovered during an IRS audit, the only corrective option is to follow the Audit Closing Agreement Program (Audit CAP).

Step 3: Establish avoidance procedures

Part of correcting a plan error is to ensure that the error will not happen again. Plan sponsors should create, document and follow new policies and procedures that will prevent future failures such as these.

Conclusion

The IRS has identified the misclassification of employee salary deferrals as designated Roth contributions and vice versa by plan sponsors as a common plan mistake. Fortunately, there is a relatively painless IRS process to remedy the situation.

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IRS Self Correction Program

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“I’ve heard that plan sponsors now have more opportunities to self correct their retirement plans without IRS submission than before. Could you explain?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Texas is representative of a common inquiry related to a plan sponsor’s ability to self correct its retirement plan without any IRS filing or fees.

Highlights of the Discussion

New Revenue Procedure (Rev. Proc.) 2019-19, effective April 19, 2019, contains updates to the IRS’s Employee Plans Compliance Resolution System (EPCRS), primarily with respect to the Self Correction Program (SCP) contained within. The other correction programs under EPCRS are the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP). In the past, SCP was reserved for the correction of certain Operational Failures (i.e., failures in which the sponsor did not operate the plan according to the terms of the plan document). SCP is expanded under Rev. Proc. 2019-19 and, under specific criteria, now allows for self correction of

  1. Certain plan document failures for 401(k) and 403(b) plans;
  2. Certain plan loan failures; and
  3. More operational failures by plan amendment.

SCP-eligible plan document failures

Rev. Proc. 2019-19 was revised to allow self correction for 401(k) and 403(b) plans that fail to adopt a required or interim amendment timely. Keep in mind these document failures are always treated as “significant failures” in the IRS’s eyes. That means, in order to use SCP, the plans must be substantially corrected, in most cases, by the last day of the second plan year following the plan year of the failure (see Section 9 of the Rev. Proc. 2019-19).

EXAMPLE

A calendar-year plan missed an interim amendment that should have been adopted by March 15, 2018. The sponsor can correct under SCP no later than the end of 2020.

Plan document failures may be corrected under SCP only if the plan, as of the date of correction, has a favorable IRS approval letter (e.g., opinion, advisory, or determination). 403(b) plan sponsors must have timely adopted a written plan effective January 1, 2009, or have corrected the document already under VCP or Audit Cap.

SCP-eligible plan loan failures

Errors relating to the failure to repay a plan loan according to plan terms (a defaulted loan) may now be corrected under SCP. The correction methods are 1) a single-sum repayment of the loan, 2) re-amortization of the outstanding loan balance for the remaining loan period, or 3) a combination of the two.

The failure of a plan to obtain spousal consent for a plan loan, when necessary, may now be corrected through SCP. The plan sponsor must notify the affected participant and spouse, so that the spouse can provide spousal consent. If the plan sponsor does not obtain spousal consent, the failure must be corrected using either the IRS’s VCP or Audit CAP.

Finally, if a participant takes more loans from the plan than the governing document says he or she can, an Operational Failure occurs. The sponsor may choose to self correct this type of error by adopting a retroactive plan amendment.

SCP-eligible operational failures

Aside from those listed above, other operational failures may qualify for correction by plan amendment under SCP. In order to be eligible, the following three conditions must be satisfied:

  1. The amendment results in an increase of a benefit, right, or feature for participants;
  2. The increase is available to all eligible employees; and
  3. Providing the increase is permitted under the Internal Revenue Code, and satisfies the general correction principles of EPCRS Section 6.02.

Conclusion

Plan sponsors can use the expanded provisions of the SCP according to Rev. Proc. 2019-19 to correct more plan failures without having to file with the IRS and pay a user fee.

 

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Correcting governmental 457(b) plans

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“Does the IRS have a correction program that covers 457(b) plans for governmental employers under the Employee Plans Compliance Resolution System (EPCRS)?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Ohio is representative of a common inquiry related to correcting 457(b) plan errors.

Highlights of the Discussion

Effectively, yes. The two avenues of correction for governmental 457(b) plans are 1) self correction (without a submission); and 2) voluntary compliance (VC) with a formal submission. The IRS accepts VC submissions for governmental plans on a provisional basis under standards that are similar to EPCRS, but that are, technically, outside of the correction system. Qualifying governmental entities are listed in Internal Revenue Code (IRC) § 457(e)(1)(A), and include a

  • State;
  • Political subdivision of a state (e.g., a county, city, town, township, village or school district); and
  • Any agency or instrumentality of a state or political subdivision of a state.

Sponsors of governmental 457(b) plans may self-correct their plans without a formal IRS submission if they did not comply with the Internal Revenue Code (IRC) or regulations in some way. A sponsor has until the first day of the plan year that begins more than 180 days after the IRS notifies it of the failure (IRC Section 457(b)(6) and Treasury Regulation Section 1.457-9(a)). Considering the amount of time governmental entities have to self-correct plan errors, they may not need to make voluntary submissions to the IRS under the following procedures.

The IRS will accept VC submissions for some errors related to 457(b) plans for governmental employers (see Section 4.09 of Revenue Procedure 2016-51 through 2018 and Section 4.09 of Revenue Procedures 2018-52 effective January 1, 2019.) Note, however, the IRS, generally, will not address any issues 1) related to the form of a written 457(b) plan document; nor 2) problems associated with top-hat[1] plans of tax-exempt entities. However, the IRS may consider a submission where, for example, the top hat plan was erroneously established to benefit the entity’s nonhighly compensated employees and the plan has been operated in a manner that is similar to a qualified plan.

The IRS’s VC unit retains complete discretion to accept or

or reject any requests for correction approval. If accepted, VC will issue a special closing agreement.

The steps to voluntary correction are

  1. Complete IRS Form 8950, Application for Voluntary Correction Program (VCP).
  2. Compose a cover letter that describes the problem and includes a proposed solution.
  3. Mail both the form and cover letter to the address listed in the instructions to Form 8950.

Sponsors will receive IRS Letter 5265 acknowledging the submission along with a control number for reference.

Conclusion

The IRS has two avenues of correction for governmental 457(b) plans: self correction without a submission; and voluntary compliance with a submission. Sponsors can refer to IRS Form 8950 and its instructions, along with Revenue Procedure 2016-51 through 2018, and 2018-52 beginning in 2019 for complete details.

 

[1] Nongovernmental 457(b) “Top Hat” plans must limit participation to groups of highly compensated employees or groups of executives, managers, directors or officers. The plan may not cover rank-and-file employees.

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