Employee Plan ‘Fix-It’ Programs and How to Use Them

Employee benefit plan requirements seem to become more complicated every year, and even vigilant employers make errors. How is a plan sponsor expected to provide useful retirement benefits when compliance is so complex? Furthermore, the probability that the 1RS or the Department of Labor (DOL) will catch violations on audit is increasing. New aiforcement initiatives and an increase in the DOL's auditing staff mean that plan sponsors are more likely to be audited than in the past. For example, the DOL's Philadelphia office has announced an initiative to examine 401(k) plans in which participants pay higher-than-average fees, and the 1RS will be focusing on the most common 401(k) plan violations it found when analyzing the results of a questionnaire sent to selected sponsors.

Many problems found when performing plan audits required under the Employee Retirement Income Security Act of 1974 (ERISA) may be corrected under available correction programs and subject to lower penalties than would apply if the 1RS or DOL found the problem first on audit or if an 1RS reviewer found it when reviewing a determination letter application. CPAs who uncover these problems or are consulted about them can facilitate compliance and lower potential exposure by assisting businesses and their legal counsel on how to use these voluntary "fix-it" programs. (See the sidebar, Which Program to Use?, for a quick look at when to use each program.)

Preparation for Plan Audit

Plans with at least 100 participants must be audited each year and submit an accountant's report as part of the Form 5500, Annual Retum/Report of Employee Benefit Plan, filing. CPAs should include in their checklists common noncompliance issues, such as late deposit of plan contributions and failure to make top-heavy contributions. A new item for audit checklists is to ascertain that plan fiduciaries received required fee disclosure from their service providers (initially due July 1, 2012) or reported any noncompliance to the DOL. Failure to do so is a prohibited transaction that must be identified on Form 5500. But even plans not subject to the official audit requirement should regularly perform self-audits to evaluate the level of plan compliance. Fiduciaries should ideally have evidence that they benchmarked the service fees and took corrective action if the fees disclosed were not reasonable with respect to the services provided.

Corrections under EPCRS

Qualified plans and Internal Revenue Code (IRC) section 403(b) annuities are eligible to use the 1RS' Employee Plans Compliance Resolution System (EPCRS) to correct many document and operational problems that affect tax qualification. Revenue Procedure 2013-12 recently updated the program by expanding the range of violations covered and simplifying some corrections, which are generally intended to position participants as though the violations had not occurred. For example, if eligible employees were inadvertently excluded from participation, the appropriate correction is for the employer to make back-contributions on their behalf. Such contributions should be adjusted for lost earnings. If a defined benefit plan made overpayments to pensioners, the plan must either request repayment plus interest from the pensioner who received the overpayments or reduce future pension payments to recoup the overpayment. The costs of correction and any applicable filing fees must be paid by the plan sponsor without reimbursement from plan assets.

There are three parts to the EPCRS program:

* Self-correction for significant and insignificant problems. If violations are not "egregious" (as defined in Revenue Procedure 2012-13) and the plan already has an 1RS determination letter (or the equivalent) and appropriate compliance procedures, the sponsor may correct operational violations without filing a formal application for relief. For significant problems, the correction must be made within a certain amount of time following the violation. Violations considered "insignificant" may be corrected at any time. If a violation can be self-corrected, it is advisable to follow the correction methods set forth in Appendix A to Revenue Procedure 2013-12 in order to avoid any doubt as to whether the correction is acceptable. Plan sponsors should solicit advice from legal or tax counsel regarding whether a problem is "significanf ' or "insignificant."

* Additional limits on self-correction. There are a few other limits on the ability to self-correct. A failure to adopt required amendments on time is not an operational violation and may never be self-corrected; instead, this type of problem requires a Voluntary Correction Program (VCP) filing in order to be corrected. Furthermore, significant operational violations may not be corrected if the plan is under examination, which, in this case, means under audit. Of course, it is best practice to undergo internal plan operations reviews periodically, as it should be cheaper for the plan sponsor to correct plan problems before the 1RS finds them.

* VCP. Violations not eligible for self-correction may be corrected under the VCP by filing a formal application and paying a user fee. Some of the violations typically corrected under the VCP are as follows: failure to admit eligible employees to the plan on time, plan loan failures, overpayments and underpayments, failure of a pension plan to get spousal consent to forms of payment other than the qualified joint and survivor annuity, and failure to timely adopt required plan amendments. For example, if a plan sponsor did not adopt Pension Protection Act amendments, a VCP application may be filed with a copy of the amendments, asking that the plan be treated as if it adopted the amendments on time. VCP may not be used if a plan is under examination-in this case, interpreted by the 1RS to include a determination letter request that is being reviewed. Therefore, if an 1RS reviewer catches the failure to amend on time, it is too late for the plan sponsor to make a VCP filing-but not too late to keep the plan qualified on a more expensive basis under the Closing Agreement Program (CAP).

* CAP. This covers other violations not eligible for self-correction or the VCP, including violations found on audit; however, the penalties will be determined by reference to the "maximum payment amount," which looks at the tax penalties that would apply if the plan were disqualified, including the value of disallowed deductions for plan contributions, and Federal Insurance Contributions Act (FICA) and income taxes that would be due on contributions and trust income. The CAP is intended to be more expensive than the VCP, but CAP penalties will be less than the maximum payment amount. Experienced legal or tax advisors can help a plan sponsor negotiate the penalties under the CAP.

The DOL's Corrections Programs

In addition to 1RS programs for tax qualification errors, the DOL vigilantly enforces fiduciary standards and monitors reporting and disclosure for ERISA plans.

Delinquent filer program. Plan sponsors who have not filed Form 5500 on time or failed to file a "top hat" notice required to exempt certain nonqualified pension plans from reporting and disclosure (including Form 5500) requirements can file for relief under the DOL's delinquent filer program, pay a modest penalty, and be treated as if they had filed on time. Statutory penalties up to $1,100 per day may be assessed for failure to timely file Forms 5500, but the maximum penalty under this program for multipleyear filings is $1,500 for a small plan and $4,000 for a large plan.

The delinquent filer program may not be used if the DOL has sent a penalty notice, but it is available even if a preliminary penalty notice has been received from the 1RS. An online penalty calculator and online payment are available.

Voluntary fiduciary correction program. Listed fiduciary violations and prohibited transactions may be corrected under the DOL's voluntary fiduciary correction program. If the transactions are also listed in a related prohibited transaction exemption, there will be no requirement to pay excise taxes or civil penalties. Notice to participants may be required and full correction-including restoration of principal, lost profits and earnings, and reimbursement of transaction costs-must be made. An online correction calculator is available.

Late deposit of plan contributions, improper payment of expenses out of plan assets, and non-exempt asset sales or purchases with parties in interest are among the listed transactions that may be corrected under this program. The applicant who has made approved corrections will receive a "no action letter" from the DOL.

Other Useful Guidance

The 1RS has 401 (k) and 403(b) plan fixit guides, which explain how to deal with the most common plan problems, available on its website (http://www.irs.gov/ Retirement-Plans/Plan-Sponsor/Fix-ItGuides-Common-Problems,-RealSolutions). A new fix-it guide is anticipated this year as a result of the 401(k) Questionnaire Project. The DOL's website also has helpful FAQs on using its correction programs (http://www.dol. gov/ebsa).

Other Penally Policies

CPAs should also be aware that agencies have penalty or waiver policies that may reduce otherwise applicable penalties, even if a formal correction program is not available. For example, the Pension Benefit Guaranty Corporation (PBGC) does not currently have a formal correction program, but it has a penalty policy limiting penalties for failure to file required reports. The DOL may waive or reduce certain penalties under Title 1 of ERISA, and the 100% second-tier tax on prohibited transactions that are not corrected is often waived by the 1RS. Written explanations of reasonable cause, ideally citing any applicable penalty policy, should be submitted.

Adding Value</p>

Employers will appreciate their advisors pointing them to available fix-it programs, which can help them make any available filings for relief. In addition to fixing historical mistakes, CPAs can help businesses develop documented control procedures to facilitate avoiding future errors or catching them quickly if they occur. 1RS audit personnel have indicated that if they see such procedures in an audit, they will not expand the scope of their examination to include, for example, additional years, and they might not examine plan operations in detail. Under the new fee disclosures, CPAs are also in a position to assist hiring fiduciaries directly and by referral to legal specialists in fulfilling the hiring fiduciaries' duty to evaluate plan fees. They can also help those fiduciaries find comparable, but less expensive, service arrangements. Reducing plan costs will merit the thanks of the corporate finance department, as well the plan fiduciaries. ?

In addition to 1RS programs for tax qualification errors, the DOL vigilantly enforces fiduciary standards and monitors reporting and disclosure for ERISA plans.

Carol Buckmann is counsel in the New York office of Osler, Hoskin & Harcourt LLP, where she advises about employee benefits and executive compensation.