better benefits

build better benefits MAXIMIZE YOUR INVESTMENT

IN YOUR EMPLOYEES

with the

NATIONALLY

RECOGNIZED

EMPLOYEE BENEFITS

TEAM.

KEY CONTACTS Sarah K. Funke

Partner Indianapolis 317-236-5883 [email protected]

icemiller.com

Raven Merlau

Associate Indianapolis 317-236-5813 [email protected]

Ann M. O’Hara

Of Counsel Indianapolis 317-236-2356 ann.o’[email protected]

Ice on Fire

SUMMARY OF IRS CORRECTION PROGRAMS FOR RETIREMENT PLANS QUICK REFERENCE GUIDE

Retirement plans – whether 401(a), 401(k), 403(b), or governmental 457(b) – enjoy significant tax advantages under the Internal Revenue Code. In exchange for these tax advantages, however, retirement plans must satisfy a long list of very specific, and often complex, rules under the Internal Revenue Code and Treasury Regulations. If a retirement plan fails to meet these rules, the retirement plan could be disqualified by the Internal Revenue Service (“IRS”) and lose its tax advantaged status. Fortunately, most plan failures can be corrected under the IRS’ correction program, the Employee Plans Compliance Resolution System (“EPCRS”), as explained below.

Self-Correction Program (“SCP”)

Voluntary Correction Program (“VCP”)

SCP allows a retirement plan sponsor to self-correct certain plan failures without IRS approval.

Under VCP, a retirement plan sponsor is required to submit its proposed correction to the IRS for approval.

SCP is available to correct operational failures only. Plan document failures cannot be corrected through SCP. •

An insignificant operational failure can be corrected under SCP.

•

A significant operational failure can also be corrected under SCP if the correction is made within two years of the failure.

Whether a failure is insignificant or significant depends on many factors, including the following:

•

Certain failures, such as plan document failures, can only be corrected through VCP.

•

Corrections made by retroactive plan amendment must generally be made through VCP.

The plan sponsor will use required IRS forms to submit the VCP, which include a description of: •

the failure,

•

the correction, and

•

the administrative changes the plan sponsor will make so that the failure does not happen again.

progression of a correction before audit;

$1,500 for plans with assets of $500,000 or less

the number and type of employees affected by the failure;

•

the period over which the failure occurred; and

•

$3,000 for plans with assets of over $500,000 to $10,000,000

•

the reason for the failure.

•

$3,500 for plans with assets over $10,000,000

•

the number of years the failure occurred;

•

•

the number of plan participants affected relative to the total number of plan participants;

•

whether the failure was corrected within a reasonable time after discovery; and

•

the reason for the failure.

Maintain the documentation with the official plan records in the event of an IRS audit.

The IRS can impose sanctions under Audit CAP based on the facts and circumstances, including:

•

the percentage of plan assets and contributions affected by the failure;

•

The IRS and plan sponsor will enter into a binding Closing Agreement with respect to the qualification failures identified during the audit.

•

•

Document in writing the error and the correction method used.

If the IRS identifies qualification failures during an audit, the IRS generally requires a retirement plan sponsor to correct the failures under Audit CAP.

steps taken by the plan sponsor to identify failures that may have occurred;

other failures occurring during the period of the failure;

•

Audit CAP is not a voluntary correction program like SCP or VCP.

•

•

In correcting a failure under VCP, a plan sponsor should:

Audit Closing Agreement Program (“Audit CAP”)

The VCP submission must be accompanied by a user fee that is based on the amount of the plan’s assets:

If the IRS approves the correction, the IRS will issue a Compliance Statement to the plan sponsor. •

A Compliance Statement is the IRS’ written approval of the correction and is binding on the IRS and the plan sponsor.

•

The IRS can give certain federal and excise tax relief through a VCP not available under SCP.

Sanctions will generally not be less than the VCP user fee that would have been applicable to that plan. If the IRS and plan sponsor cannot agree as to the correction methods for any qualification failures identified during the audit, the IRS can disqualify the plan.

These materials are intended for general information purposes only and do not constitute legal advice. The materials should not be used or relied upon as a substitute for a review of applicable statutes, regulations, rulings and court decisions. The reader should consult legal counsel to determine how laws apply to specific situations. These materials were prepared in January 2018, and, consequently, will not reflect changes in law subsequent to that date. Attorney Advertising Material | © 2018 Ice Miller LLP.