New IRS Compliance Tool

Web-based chart provides tips on avoiding mistakes to facilitate ongoing and future plan compliance

The Internal Revenue Service has launched a new Web-based tool to help 401(k) plan sponsors identify, correct, and avoid common errors. The tool, “401(k) Plan Potential Mistakes,” includes a chart that identifies 11 problem areas in retirement plans, including plan document updates, plan operation, definition of compensation, nondiscrimination test failures, and excess deferrals.

The chart leads you to a series of questions, tips, and examples that can help you pinpoint potential errors. It describes the various correction programs available under the Employee Plans Compliance Resolution System and includes an explanation of how to correct the mistake. The chart also provides tips on avoiding the mistake to facilitate ongoing and future plan compliance. Please see Exhibit 1 for a sample portion of the chart. Below is an excerpt from the IRS article and a link to the chart.

Exhibit 1: 401(k) Plan Potential Mistakes Chart (sample portion of the chart)

Employee Plans Compliance Resolution System (EPCRS) — Overview
If mistakes are made with respect to your 401(k) plan, you may utilize the IRS’s Employee Plans Compliance Resolution System (EPCRS) to remedy your mistakes and avoid the consequences of plan disqualification. A correction for a mistake should be reasonable and appropriate. The correction methodology should resemble one already provided for in the Code and all applicable facts and circumstances should be considered. The EPCRS is set forth in Rev. Proc. 2006-27, 2006-22 I.R.B. 945. There are three components of EPCRS:

1. Self-Correction Program (SCP)
   Permits a plan sponsor to correct certain plan failures without contacting the IRS.
2. Voluntary Correction Program (VCP)
   Permits a plan sponsor to, any time before audit, pay a limited fee and receive the Service’s approval for correction of plan failures.
3. Audit Closing Agreement Program (Audit CAP)
   Permits a plan sponsor to pay a sanction and correct a plan failure while the plan is under audit.

A general description of each component of EPCRS is provided below:

SCP
In order to be eligible for SCP, the plan sponsor or administrator of a plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with applicable IRS requirements. For example, the plan administrator of a Qualified Plan that may be top-heavy under Code A7 416 may include in its plan operating manual a specific annual step to determine whether the plan is top-heavy and, if so, to ensure that the minimum contribution requirements of the top-heavy rules are satisfied. A plan document alone does not constitute evidence of established procedures.

• SCP is available for correcting operational problems only — that is, the failure to follow the terms of your plan. SCP is not available for other types of problems, such as the failure to keep your plan document up to date to reflect changes in the law.
• The plan sponsor effects correction using the General Correction Principles set forth in Rev. Proc. 2006-27.
• A plan sponsor that corrects a failure listed in, and in accordance with, the correction methods included in Appendix A or Appendix B of Rev. Proc. 2006-27 may be certain that the correction effected is reasonable and appropriate for the failure.
• If needed, the plan sponsor effects changes to its administrative procedures to ensure the failures do not recur.
• A plan sponsor may correct Significant Operational Failures within two years of the end of the plan year in which the Operational Failures occurred.
• If a plan sponsor does not correct Operational Failures in its plan(s) within the two-year self-correction period, the Self-Correction Program may be used if, considering all of the facts and circumstances, the failures, in the aggregate, are Insignificant Operational Failures.
• When using SCP, the plan sponsor should maintain adequate records to demonstrate correction in the event of an audit of the plan.
• There is no fee for self-correction.

VCP

• The plan sponsor identifies the failures.
• The plan sponsor proposes correction using the General Correction Principles set forth in Rev. Proc. 2006-27, section 6.
• The plan sponsor proposes changes to its administrative procedures to ensure the failures do not recur.
• The plan sponsor pays a compliance fee that generally is based on the number of plan participants as reported on the most recently filed Form 5500 series return according to Exhibit 2.

Exhibit 2: Compliance Fee Based on Number of Plan Participants

Number of Plan Participants	Compliance Fee
20 or fewer	$750
21 to 50	$1,000
51 to 100	$2,500
101 to 500	$5,000
501 to 1,000	$8,000
1,001 to 5,000	$15,000
5,001 to 10,000	$20,000
Over 10,000	$25,000

• The IRS issues a Compliance Statement with respect to the plan detailing the qualification failures identified by the plan sponsor and the applicable correction methods approved by the IRS.
• The plan sponsor corrects the identified failures within 150 days of the issuance of the Compliance Statement.
• While the submission is pending, the plan will not be examined by Employee Plans, except under unusual circumstances.

Audit CAP

• The plan sponsor or plan is Under Examination.
• 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 negotiated with the IRS.
• The sanction paid under Audit CAP should be greater than the fee paid under VCP.
• For plans intended to be qualified, the sanction under Audit CAP 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).

For more information and to view the complete 401(k) Plan Potential Mistakes chart, please visit http://www.irs.gov/ pub/irs-tege/401k_mistakes.pdf.