The American Retirement Association (ARA) in a Dec. 11 letter to Acting IRS Commissioner David Horton has made suggestions regarding the Employee Plans Compliance Resolution System (EPCRS). Namely, the ARA has suggested that the IRS provide additional examples of “significant” and “insignificant” failures, and permit the self-correction of certain loan failures.
The ARA on April 4 had filed a comment letter with the IRS to recommend modifications to EPCRS that would expand the use of the self-correction program (SCP) and reduce the burden the voluntary compliance program's (VCP) new pricing structure imposes on small business plans. In the Dec. 11 letter, the ARA notes that as it had said to the IRS in April, “ARA members report that it is often unclear whether an error is significant or insignificant under EPRCS,” the letter says. It continues, “This often causes sponsors to feel a need to file under VCP. ARA believes clarification of what is significant would reduce the need for precautionary VCP submissions, reduce the burden on both plan sponsors and the Service, and promote sound voluntary corrections through SCP.”
The IRS announced on Sept. 28 in Revenue Procedure (Rev. Proc.) 2018-52 that it had issued new procedures for using the www.pay.gov website to file VCP submissions and pay user fees. Beginning on April 1, 2019, the IRS will no longer accept paper VCP submissions or process user fees paid with a paper check. During the transition period from Jan. 1, 2019, through March 31, 2019, plan sponsors may file VCP submissions with the IRS either by using www.pay.gov or by filing paper VCP submissions in accordance with the procedures outlined in Rev. Proc. 2016-51.
In its Dec. 11 letter, the ARA recommended that the IRS provide the following additional examples of significant and insignificant failures under the SCP to clarify when an error is insignificant for this purpose:
- New Example 3.01: The facts are the same as in Example 1, except that the annual additions of 7 of the 50 employees whose benefits were limited by § 415(c) nevertheless exceeded the maximum limitations under § 415(c) during the 2005 limitation year, and the amount of the excesses ranged from $15,000 to $25,000 (and totaled $150,000). Under these facts, taking into account the number of participants affected by the failure relative to the total number of participants who could have been affected by the failure for the 2005 limitation year (and the monetary amount of the failure relative to the total employer contribution), the failure is insignificant. Accordingly, the § 415(c) failure in Plan A that occurred in 2005 is eligible for correction under this section 8 as an insignificant failure.
- New Example 3.02: The facts are the same as in Example 3, except the amount of the excesses ranged from $1,000 to $3,500 (and totaled $50,000). Under these facts, taking into account the number of participants affected by the failure relative to the total number of participants who could have been affected by the failure for the 2005 limitation year (and the monetary amount of the failure relative to the total employer contribution), the failure is insignificant. Accordingly, the § 415(c) failure in Plan A that occurred in 2005 is eligible for correction under this section 8 as an insignificant failure.
- New Example 4.01: Employer J maintains Plan C, a profit sharing plan with a 401(k) feature established in 2000. The plan document satisfies the requirements of § 401(a). The formula under the plan provides for employee deferrals and match based on an employee’s W-2 wages. Out of the plan’s 325 participants, 48 receive quarterly commission checks. Quarterly commission checks are less than 15% of each employee’s total compensation. Due to an incorrect payroll code the employer did not include the quarterly checks in calculating deferrals and match for all 48 of the participants who received commissions, resulting in missed deferral opportunity and match for those participants' accounts. Under these facts, although the number of participants affected by the failure relative to the number of participants that could have been affected is significant, the number of participants affected compared to the total participants in the plan is insignificant, and the failure is due to minor coding error. Thus, the failure occurring in 2005 is insignificant and therefore eligible for correction under this section 8.
- New Example 6: Employer J maintains Plan C, a profit sharing plan with a 401(k) feature established in 2000. The plan document satisfies the requirements of § 401(a). The formula under the plan provides for employee deferrals and match based on an employee’s W-2 wages. Out of the plan’s 5 participants, only 1 individual receives a car allowance. The car allowance is less than 10% of such employee’s total compensation. Due to an incorrect payroll code the employer did not include the car allowance in calculating deferrals and match, resulting in missed deferral opportunity and match for those participants' accounts. The error is found in 2008 and is immediately corrected. Under these facts, although the number of participants affected by the failure relative to the number of participants that could have been affected is significant, the number of participants affected compared to the total participants in the plan is treated as insignificant because the small size of the plan is taken into account in determining significance. In addition, because the failure is due to minor coding error and the error was corrected quickly after discovery, the length of error does not prevent this from being insignificant. Thus, the failure occurring in 2000-2008 is insignificant and therefore eligible for correction under this section 8.
The Dec. 11 letter continues that the ARA “remains very interested in ways that SCP may be improved, including the many recommendations we previously made in our April 2018 letter.” And the ARA says that it “welcomes the opportunity to continue the dialogue.”
