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.
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
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
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
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
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)
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
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)
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
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”
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
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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