Ensuring Retirement Plan Compliance With An Annual Plan Review

Written By Lisa Tomlin

"You don't know what you don't know." Sounds like a song or a cliché, but this is true when it comes to the administration of retirement plans. It is difficult for plan sponsors, regardless of whether the administration is handled in-house or by a third party administrator, to know what administrative errors are occurring. The errors may involve the inadvertent failure to follow the terms of the plan document or there may be other legal or regulatory rules that are not being followed or have not been updated in the plan.

The IRS recommends that plan sponsors do "self reviews" on at least an annual basis to avoid having to say to an IRS or DOL auditor, "we didn't know about that." Performing reviews on an annual basis can also mitigate the cost of corrections since most operational failures can be corrected using the Self-Correction Program (SCP) as described below. If errors are found upon an IRS audit of the plan, significant sanctions can be imposed. In addition to monetary sanctions, the IRS could remove the tax qualified status.

It's probably safe to say that most, if not all, plans have some degree of errors.

Some of the most common errors as reported by the IRS are:
•  Failure to follow the terms of the plan document.
•  The amount of compensation as used for various purposes of the plan does not follow the definition of compensation in the plan.
•  Plan loans not in compliance with the plan or IRC §72(p).
•  Hardship distributions not in compliance with the plan.
•  Failure to contribute employer matching contributions in accordance with the terms of the plan.

Once errors are discovered, the IRS recommends that corrections be made under their Employee Plans Compliance Resolution System (EPCRS). Revenue Procedure 2008-50 provides guidance on the correction methodology.

EPCRS divides corrections into three components:
1.  Self-Correction Program (SCP)
2.  Voluntary Correction Program (VCP)
3.  Audit Closing Agreement Program (Audit CAP)

Self-Correction Program (SCP) — This component of the correction program permits a plan sponsor to correct plan failures without contacting the IRS. There is no fee to self-correct; how- ever, not all errors can be corrected using this method. The corrections must be implemented using the General Correction Principles provided for in Revenue Procedure 2008-50.

The general requirements to utilize self-correction are:
•  The plan sponsor or administrator must have established practices and procedures (formal or informal) that are reasonably designed to facilitate overall compliance with applicable IRS requirements.
•  Corrections must be for errors in the operation of the plan. In other words, errors for not following the terms of the plan. SCP is not available for any other type of error such as failure to amend a plan to comply with changes in the law.
•  Significant operational errors must be corrected within two years starting with the plan year following the year the error occurred.
•  Must update any administrative procedures to ensure the error does not recur.
•  If corrections are not made within the two year timeframe, the plan sponsor may still be able to utilize self-correction if the errors, in the aggregate, are not significant.
•  Documentation of the corrections should be maintained in the event of an audit.

Voluntary Correction Program (VCP) — This component of the correction program permits a plan sponsor to "come clean" with the IRS by filing for IRS approval with regard to the proposed correction methods. There is a limited, prescribed fee for this filing based on the number of participants in the plan. With the exception of unusual circumstances, the IRS will not examine a plan while the VCP submission is pending. Once the IRS approves the correction methods, a Compliance Statement is issued and corrections must be made within 150 days.

Other requirements when filing under VCP:
•  The plan must not be under examination (audit).
•  The plan sponsor must identify the errors.
•  The plan sponsor must provide steps taken to ensure the error(s) will not recur.
•  Corrections should be reasonable and follow the guidelines in Revenue Procedure 2008-50.

Audit CAP  — This component of the correction program only comes into play while a plan is under examination.

Requirements and sanctions under this correction program are:
•  The plan sponsor enters into a Closing Agreement with the IRS.
•  The plan sponsor effects correction prior to entering into the Closing Agreement.
•  The plan sponsor pays a sanction that is negotiated with the IRS, but the sanction should be greater than the fee for filing a VCP.
•  The sanction is a negotiated percentage of the Maximum Payment Amount(MPA) based on the sum for all open taxable years of the:

1.  Tax on the trust (Form 1041) (and any interest and penalties applicable to the trust tax return).
2.  Additional income tax resulting from the loss of employer deductions for plan contributions (and any interest and penalties applicable to the plan sponsor's tax return).
3.  Additional income tax resulting from income inclusion for participants in the plan (Form 1040), including the tax on plan distributions that have been rolled over to other qualified trusts (and any interest and penalties applicable to the participants' tax return).

How We Can Help
The consultants at Findley Davies are specialists in compliance reviews of both defined contribution and defined benefit plans. We have worked with providers, plan sponsors and outside ERISA legal counsel to conduct reviews and assist with corrections.