Correcting Administrative Errors in DC Plans Jane Armstrong, Esq., - - PDF document

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Correcting Administrative Errors in DC Plans Jane Armstrong, Esq., - - PDF document

Jan 26, 2023 582 likes •826 views

Correcting Administrative Errors in DC Plans Jane Armstrong, Esq., Phelps Dunbar LLP Jane Armstrong, Esq., Partner, Phelps Dunbar, LLP Jane Armstrong is a partner at Phelps Dunbar LLP, a regional law firm that is headquartered in New Orleans.

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SLIDE 1

Correcting Administrative Errors in DC Plans

Jane Armstrong, Esq., Phelps Dunbar LLP

Jane Armstrong, Esq., Partner, Phelps Dunbar, LLP Jane Armstrong is a partner at Phelps Dunbar LLP, a regional law firm that is headquartered in New Orleans. She has practiced exclusively in the areas of employee benefits and executive compensation for over 30 years. Jane has been listed in all editions of the Best Lawyers in America and "Louisiana Super Lawyers," and is listed in Chambers U.S.A. as a leading practitioner in the employee benefits

  • field. She is a frequent speaker and author on retirement

plan issues. Jane graduated from Vanderbilt University School of Law, where she was elected to the Order of the Coif.

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SLIDE 2

Common Correction Programs

  • Rev. Proc. 2013-12 (1/22/2013)
  • Employee Plans Compliance Resolution System (EPCRS)
  • Effective as of April 1, 2013
  • Generally provides for correction of qualification failures
  • DFVCP
  • Delinquent Filer Voluntary Compliance Program
  • Department of Labor (DOL) program to voluntarily correct late or

missed Form 5500 filings

  • VFCP
  • Voluntary Fiduciary Correction Program
  • DOL program to voluntarily correct 19 common transactions that

may constitute a fiduciary breach or prohibited transaction

EPCRS – Three Types of Correction

  • Self-Correction (SCP)
  • No filing, no fee, no compliance statement, no reliance
  • Voluntary Correction (VCP)
  • Filing, fee, compliance statement issued, reliance
  • Correction on Audit (Audit Cap)
  • Penalty imposed, closing/compliance statement issued, reliance
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SLIDE 3

EPCRS – Four Types of Errors/Failures

  • Plan Document Failure: Plan provision (or omission)

that violates Code Section 401(a)

  • Demographic Failure: Failure to satisfy Code Section

401(a)(4) or (a)(26) or 410(b)

  • Operational Failure: Failure to follow plan’s terms
  • Employer Eligibility Failure: Employer not eligible to

maintain cash or deferred arrangement Generally Applicable Principles for Correction

  • Full correction generally required:
  • All affected participants and beneficiaries
  • All years, whether or not “closed”
  • Restore plan to position “but for” failure
  • Correction – appropriate and reasonable
  • Keep plan assets in plan
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SLIDE 4

Generally Applicable Principles for Correction

  • Full correction generally required:
  • Consistent with the Code (don’t violate another Code provision)
  • Consistent with plan’s terms in effect when failure occurred (for

allocations and distributions)

  • May vary from plan year to plan year, but consistent within a

single plan year

  • “New” employer contributions – forfeitures may be used only if

plan permits (allocations)

Full Correction Principles

  • Exceptions:
  • If correction made through another program, EPCRS not required
  • Reasonable estimates permitted if actual data unavailable or use

would not make a material difference

  • Distribution is $75 or less and direct cost of distribution more
  • Overpayment is $100 or less
  • Lost participants cannot be found after reasonable efforts
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SLIDE 5

Generally Applicable Approved Correction Methods

  • Eligible employer failures (correct under VCP)
  • Cease contributions
  • Hold assets in trust
  • Distribute when otherwise eligible
  • Failure to obtain spousal consent
  • Notify and obtain consent
  • If consent cannot be obtained:
  • Spouse entitled to survivor’s portion of QJSA; must be provided if

spouse makes claim

  • Alternative: offer choice between consent to actual distribution,

QJSA or single sum

Generally Applicable Approved Correction Methods

  • “Excess amounts”
  • Includes deferrals in excess of plan limits, 415 excess, 402(g)

excess, 401(a)(17) excess

  • Correct:
  • If employee deferral, distribute with notice (not eligible for rollover)
  • Otherwise, reduce account balance and place in unallocated account
  • Report (1099-R) in year of distribution
  • Participant loan failures (72(p) violations)
  • If deemed distribution, may request that 1099-R (deemed

distribution) be reported in year of correction

  • Non-compliant plans (loans) cannot be corrected after maximum

loan term expires

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SLIDE 6

Generally Applicable Approved Correction Methods

  • Participant loan failures (72(p) violations)
  • If plan includes 72(p) language, correct by:
  • Repayment (single-sum) of arrears
  • Reamortize outstanding balance and interest
  • Overpayments
  • Reasonable steps to collect
  • Allocate to unallocated account

Tax and Similar issues

  • Generally excise taxes not waived, but:
  • Non-deductible contributions, IRS may waive
  • Excess contributions or excess aggregate contributions, IRS

may waive

  • RMD failure, must request waiver in submission
  • Overpayments, IRS may impose 10% penalty tax under Code

Section 72(t)

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SLIDE 7

Key Terms

  • “Under examination”
  • Sponsor received notice of examination (employee plans)
  • Sponsor received notice of referral to employee plans
  • Ongoing employee plans examination
  • Notice of failure during determination letter request
  • “Favorable letter”
  • Individual determination letter
  • Opinion letter or notification letter for preapproved plans; sponsor

has adopted without substantial modification

Key Terms

  • “Unallocated account” separate account used to offset

employer contributions; employer cannot contribute (except deferrals) until account is allocated

  • “Earnings”
  • If self-directed, actual or highest rate of any fund (if most NHCEs)
  • If not self-directed, plan’s rate
  • Includes losses
  • Applies to allocations and distributions
  • “Practices and Procedures”
  • May be written or unwritten
  • Need not relate to failure
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SLIDE 8

SCP PROCEDURES

Specific Rules for SCP FOUR STEPS:

  • Determine if plan is eligible
  • Determine if failure is insignificant/significant
  • Must be operational
  • Correct
  • Document the correction (business record)
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SLIDE 9

Specific Rules for SCP - Eligible Plans

  • Available for:
  • Qualified plans
  • 403(b)
  • SEPS and Simple IRAs (insignificant failures only)
  • Cannot be “under examination,” except that insignificant

failures may be corrected or correction in process may be completed

  • Must have favorable letter
  • Must maintain practices and procedures

Specific Rules for SCP - Failures Eligible for Correction

  • Identify failure period (usually by plan year)
  • Identify operational failure
  • Determine whether failures are insignificant or significant
  • Number of failures occurring within same period;
  • Number of periods in which failures occurred;
  • % of plan assets involved;
  • % of total participants involved;
  • Number of participants affected when compared to number that

could have been affected;

  • Whether correction made within a reasonable time after

discovery;

  • Reason for failure
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SLIDE 10

Specific Rules for SCP - Correction of Significant Failures

  • Significant failures:
  • Must correct using method prescribed in 2013-12
  • Must be corrected or substantially corrected with “correction

period”

  • Correction period – ends on last day of second plan year

following plan year in which failure occurred

  • Failures of ADP/ACP third year
  • Assets acquired in merger or acquisition, last day of first plan year

beginning after transaction

  • Substantially corrected if:
  • Correction initiated during correction period and completed within

120 days after end of period; or

  • Correction completed for 65% of affected participants during period

and then “diligently” complete

Specific Rules for SCP - Correction by Plan Amendment

  • Retroactive amendment may be used to conform plan’s

terms to actual operation

  • Limited to (App. B, Sec. 2.07):
  • Code Section 401(a)(17) failures - amend to provide for

additional allocation

  • Hardship and loans – amend to permit
  • Early inclusion of otherwise eligible employee – amend entry

conditions; limit to affected employees if primarily NHCEs, subject to Code Section 401(a)(4)

  • Correction must be consistent with App. B
  • Submit amendment with on-cycle determination letter

request and mark as “SCP”

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SLIDE 11

Specific Rules for SCP – Correction Documentation

  • Written business record
  • Include the following:
  • Describe operational failure(s)
  • Establish/describe procedures and any changes made to prevent

reoccurrence

  • Retain favorable letter
  • Whether failure considered significant/insignificant (if

insignificant, summarize factors considered)

Specific Rules for SCP – Correction Documentation

  • Business record to include the following:
  • Describe correction, including:
  • List of participants and specific allocations (distributions) made
  • Steps taken to locate missing participants
  • Earnings calculations
  • When completed
  • Attach documentary evidence of correction
  • Any special circumstances (e.g., transferred assets)
  • Signed and dated by (or accepted) by administrator
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SLIDE 12

VCP PROCEDURES

Specific Rules for VCP

  • Determine eligible plan
  • Cannot be “under examination”
  • Identify failures; may be operational, document,

demographic

  • Determine proposed correction method(s)
  • Prepare written VCP submission
  • Form 8950 (application) required
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SLIDE 13

Specific Rules for VCP

  • Pay filing fee
  • Form 8951 (fee) required
  • Compliance statement issued
  • Complete correction (implement within 150 days of

compliance statement)

  • Verification of correction to IRS

Specific Rules for VCP – Form 8950

  • Complete description of failures, years and number of

affected employees

  • Explanation of why (how) failures arose
  • Description of correction method(s)
  • Method to calculate earnings
  • Calculations for each affected employee
  • Method to locate lost participants
  • New procedures implemented to avoid reoccurrence
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SLIDE 14

Specific Rules for VCP – Form 8950

  • Request relief from 10% tax on early distributions
  • Request relief from deemed distribution (participant

loans)

  • Represent:
  • Not under examination
  • Not party to abusive transaction
  • Signed by sponsor (POA not acceptable)
  • Penalty of perjury statement

Specific Rules for VCP – Form 8951

Number of Participants Fee 20 or less $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

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SLIDE 15

Specific Rules for VCP – Form 8951

  • Special (reduced) fees:
  • Failure to make MRD - $500 (if 50 or fewer participants)
  • Non-amender and correct within one year following remedial

amendment period – 50% reduction

  • Non-amender failure to timely adopt optional or interim

amendments - $375

AUDIT CAP

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SLIDE 16

Audit CAP

  • Applies: qualification failure during examination (includes

determination letter request)

  • Sanction imposed:
  • Negotiated from “maximum payment amount,” except for non-

amender failures (scheduled amount)

  • Maximum payment amount determined under Rev. Roc. 2003-44
  • Factors considered:
  • Steps taken by sponsor
  • Extent to which correction in process
  • Number and type of affected employees
  • Number of NHCEs
  • Type of failure
  • Reason for failure

CORRECTIONS

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SLIDE 17

Appendices A and B

  • Appendices A and B provide “reasonable and

appropriate” correction methods for specified failures and appropriate earnings adjustments

  • Appendices A and B are not exclusive; other corrections

may be acceptable Operational Error – Appendices A and B Failures and Corrections

Failure Correction Failure to provide top- heavy minimum Contribute, including earnings Failure to satisfy ADP/ACP (Appendix A)

  • Contribute QNEC to NHCEs
  • Make for all eligible NHCEs
  • Same % of compensation
  • Need not match QNEC
  • Must satisfy ACP

Failure to satisfy ADP/ACP (Appendix B) Alternative is one-to-one (distribute excess to HCEs and contribute same amount to NHCEs as QNEC)

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SLIDE 18

Operational Error – Appendices A and B Failures and Corrections

FAILURE CORRECTION Failure to timely distribute deferrals in excess of 402(g) limit

  • Distribute
  • Report in year of distribution and in year of

deferral

  • Distribution included in ADP for HCEs, but not

NHCEs

  • Excess match forfeited

Exclusion of eligible employee – profit sharing (Appendix A) Make contributions Exclusion of eligible employee – profit sharing (Appendix B)

  • Recalculate and reallocate contribution, by

debiting accounts (discretionary contribution)

  • If accounts of NHCEs primarily debited, no

adjustment for earnings required (reallocate principle only) or may calculate earnings using lowest rate of return

Operational Error – Appendices A and B Failures and Corrections

FAILURE CORRECTION Exclusion – deferral

  • pportunity (non-

safeharbor)

  • Contribute 50% of missed deferrals
  • Calculate using HCE/NHCE rate of deferral
  • Contribute any missed match

Exclusion – deferral

  • pportunity

(safeharbor match)

  • Contribute 50% of missed deferrals
  • Calculate as greater of 3% or rate of deferrals

matched at 100%

  • Contribute match

Exclusion – deferral

  • pportunity

(safeharbor 3% non- elective)

  • Contribute 50% of missed deferrals
  • Calculate as 3% of compensation in first year, use

plan terms for subsequent years

  • Contribute non-elective
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SLIDE 19

Operational Error – Appendices A and B Failures and Corrections

FAILURE CORRECTION Exclusion of eligible employee – catch up Make 50% of catch-up contributions Failure to implement employee deferral election

  • Contribute 50% of missed deferrals
  • Calculate using employee’s election
  • Contribute match as QNEC

Partial year exclusion/failure to implement (Appendix B)

  • May prorate compensation to determine

contribution

  • If exclusion less than 3 months, no correction for

missed deferrals

Operational Error – Appendices Failures and Corrections

FAILURE CORRECTION Failure to timely pay RMD

  • Calculate and distribute
  • May request waiver of excise tax

Failure to obtain spousal consent

  • Participant obtains informed consent or receives

QJS or single-sum PV

  • If consent cannot be obtained, pay QJS, but

reduce participant’s portion by amounts previously paid; cannot reduce survivor’s benefit Failure to comply with Code Section 415 (excess annual addition)

  • Reduce account by excess
  • If employer contribution, allocate to other

employees or allocate to unallocated account

  • Distribute deferrals
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SLIDE 20

Operational Error – Appendices A and B Failures and Corrections

FAILURE CORRECTION Vesting failure Appendix B)

  • Allocate or distribute
  • If amount allocated as additional employer

contribution, may reduce account balances

SUMMARY OF ELIGIBILITY CONDITIONS

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SLIDE 21

EPCRS – Eligibility (Plans, Failures, Conditions)

SCP VCP

AUDIT CAP

Plan Document Failures Not Available Available Available Operational Defects Available Available Available Qualified Plans Available (significant/ insignificant) Available Available 403(b) Available (significant/ insignificant) Available Available

EPCRS – Eligibility (Plans, Failures, Conditions)

SCP VCP

AUDIT CAP

SEPs Available (insignificant

  • nly)

Available Available SIMPLE IRAs Available (insignificant

  • nly)

Available Available Plan “Under Examination” Available to correct insignificant

  • perational

failures; Significant failures substantially completed Not Available Available

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SLIDE 22

EPCRS – Eligibility (Plans, Failures, Conditions)

SCP VCP

AUDIT CAP

Favorable Letter Required or SEP/Simple maintained

  • n IRS Form

Not required Not required Established Practices and Procedures Plan must maintain Not required Not required Using Plan Amendment to Correct Limited use permitted (Sec. 2.07) Permitted Permitted

EPCRS – Eligibility (Plans, Failures, Conditions)

SCP VCP

AUDIT CAP

Employer Eligibility Failure Not available Available Available After Plan Termination Not available Available Available Egregious Failures Not available Available (extra fees) Available

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SLIDE 23

COMMON FAILURES APPROPRIATE CORRECTION PROGRAM Selecting Correction Program – Common Error

ERROR CORRECT USING Late or missed 5500 filing DFVCP Late or missed deposit of deferrals or participant loan repayments VFCP Participant loan failures EPCRS VFCP (with EPCRS for certain failures) Failure to timely amend (document error) EPCRS Operational error EPCRS Fiduciary breach/prohibited transaction VFCP