Summer 11 - Correcting 403(b) Plan Errors – The Current State
As a result of having gone through the process of the first financial statement audit of their 403(b) plans last year, many 403(b) plan sponsors have been confronted with operational errors discovered during the audit and are now wondering how to correct these errors without jeopardizing the tax favored status of their plans. The following is a general discussion of which errors may be corrected and how they may be corrected using Internal Revenue Service (IRS) guidelines and correction programs.
Plan Document Errors
The IRS does not currently offer a program for 403(b) plan sponsors to correct plan document errors; however, they are in the process of updating their current correction programs under Revenue Procedure 2008-50, Employee Plans Compliance Resolutions System (EPCRS), to provide 403(b) plans with a correction procedure. What this means for now is that if 1) a 403(b) plan sponsor did not adopt and execute a written plan document that satisfied the legal requirements of Internal Revenue Code (IRC) section 403(b) and the final regulations there under by December 31, 2009, or 2) the plan sponsor had a plan document, but failed to operate the plan in accordance with the written provisions of the plan document, then the plan sponsor cannot, currently, submit such errors to the IRS to correct the errors, which would give the sponsor assurance that such issues will not be raised by the IRS during a future audit of the plan.
What a plan sponsor can do currently if they discover plan document errors is to contact their plan adviser to discuss a process for correcting the errors in a manner similar to what the IRS would require of a plan sponsor that could use EPCRS to correct such errors. If a plan sponsor takes such action and documents the corrections, they have at least demonstrated a good faith effort to correct the error and comply with the law. The IRS will, generally, look favorably on such correction efforts and will be willing to work with the plan sponsor if the plan is audited.
Operational Failures
403(b) plan sponsors that have discovered errors in their plan’s operation may currently use EPCRS to correct the following types of errors:
The correction of these types of operational failures may be pursued in a manner similar to that outlined in Revenue Procedure 2008-50 and may or may not require the plan sponsor to submit the errors to the IRS for review and approval. Plan sponsors should contact their plan advisers to determine how best to correct an operational failure under the IRS’ correction program and whether the situation requires a formal submission to the IRS to correct the problem.
Conclusion
Sponsors of 403(b) plans whose plans are required to file a Form 5500 and/or have audited financial statements for their plans should not ignore problems with their plans should they be uncovered in a future IRS audit. Rather a plan sponsor should take advantage of the programs available through EPCRS to mitigate their risk of penalties should the IRS audit their plan in the future.
Plan Document Errors
The IRS does not currently offer a program for 403(b) plan sponsors to correct plan document errors; however, they are in the process of updating their current correction programs under Revenue Procedure 2008-50, Employee Plans Compliance Resolutions System (EPCRS), to provide 403(b) plans with a correction procedure. What this means for now is that if 1) a 403(b) plan sponsor did not adopt and execute a written plan document that satisfied the legal requirements of Internal Revenue Code (IRC) section 403(b) and the final regulations there under by December 31, 2009, or 2) the plan sponsor had a plan document, but failed to operate the plan in accordance with the written provisions of the plan document, then the plan sponsor cannot, currently, submit such errors to the IRS to correct the errors, which would give the sponsor assurance that such issues will not be raised by the IRS during a future audit of the plan.
What a plan sponsor can do currently if they discover plan document errors is to contact their plan adviser to discuss a process for correcting the errors in a manner similar to what the IRS would require of a plan sponsor that could use EPCRS to correct such errors. If a plan sponsor takes such action and documents the corrections, they have at least demonstrated a good faith effort to correct the error and comply with the law. The IRS will, generally, look favorably on such correction efforts and will be willing to work with the plan sponsor if the plan is audited.
Operational Failures
403(b) plan sponsors that have discovered errors in their plan’s operation may currently use EPCRS to correct the following types of errors:
- Excluding eligible employees from the plan
- Failure to make salary deferrals universally available to employees
- Failure to limit participant salary deferrals to the IRC section 402(g) limit (currently $16,500)
- Failure to limit employer matching contributions under IRC section 401(m)
- Failure to limit participant compensation for plan purposes to the IRC section 401(a)(17) limit (currently $245,000)
- Failure to pay required minimum distributions to plan participants
- Failure to satisfy distribution restrictions on salary deferrals and employer contributions under IRC sections 403(b)(7) and 403(b)(11)
- Problems with direct rollovers of participant distributions
- Failure to meet the general nondiscrimination rules under IRC section 401(a)(4) as applied to 403(b) plans
- Failure to meet the minimum coverage requirements of IRC section 410(b)
The correction of these types of operational failures may be pursued in a manner similar to that outlined in Revenue Procedure 2008-50 and may or may not require the plan sponsor to submit the errors to the IRS for review and approval. Plan sponsors should contact their plan advisers to determine how best to correct an operational failure under the IRS’ correction program and whether the situation requires a formal submission to the IRS to correct the problem.
Conclusion
Sponsors of 403(b) plans whose plans are required to file a Form 5500 and/or have audited financial statements for their plans should not ignore problems with their plans should they be uncovered in a future IRS audit. Rather a plan sponsor should take advantage of the programs available through EPCRS to mitigate their risk of penalties should the IRS audit their plan in the future.
###
Benefit Plan Advisor is produced quarterly by BMF's Employee Benefit Plan Services Group. If you would like additional information about how we may be able to help your business, please contact James E. Merklin, CPA, CFF, CFE, M.Acc. at 330.255.2448 or via email.
This publication has been prepared by PKF member firm EisnerAmper LLP for informational purposes only. These materials do not constitute accounting, tax or legal advice and cannot be relied upon by any taxpayer for the purpose of avoiding penalties imposed under the Internal Revenue Code.
Redistributed by Bober Markey Fedorovich, a member of PKF International, with permission.