Compliance May 8, 2015

EPCRS Updates Are Good News for Plan Sponsor Clients

Amendments to the Internal Revenue Service’s Employee Plans Compliance Resolution System are expected to ease compliance and reduce costs for retirement plan sponsors.
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Retirement plan sponsors are seeing changes to the Employee Plans Compliance Resolution System (EPCRS), which allows corrections to plan document form and plan operation errors. The updates ultimately make it easier and potentially less expensive to correct common plan errors.

In recent weeks, the Internal Revenue Service (IRS) has issued Revenue Procedure 2015-27 and Revenue Procedure 2015-28. Both make amendments to the Self-Correction Program (SCP), Voluntary Correction Program (VCP) and Audit Closing Agreement Program (Audit CAP).

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The primary intention of Revenue Procedure 2015-27 is to correct plan overpayments, while also addressing other minor changes.

Alice Murtos, partner at Sutherland Asbill & Brennan LLP explains, “Up to this point, plan sponsors have been required to attempt to recover overpayments from participants, a significant financial burden in some cases. The IRS has clarified that plan sponsors do not have to seek repayment in all cases if they are willing to undertake a more appropriate correction, such as making a corrective contribution to the plan or adopt a retroactive amendment.”

The revenue procedure also allows for excess annual additions under IRS Code Section 415(c) may now be “self-corrected” by distributing excess amounts no later than 9 1/2 months after the plan’s limitation year. Currently excess annual additions must be distributed within 2 1/2 months after the plan’s limitation year.

Revenue Procedure 2015-28 includes new safe harbor methods for correcting elective deferral failures. “Rather than requiring plan sponsors to make up 50% of a participant’s missed deferrals, the new correction methods allow plan sponsors to correct certain short-term failures without making any contribution for missed deferrals, and certain longer-term elective failures by making a corrective contribution of 25% of a participant’s missed deferrals,” says Brenna M. Clark, associate at Sutherland Asbill & Brennan LLP. “The plan sponsor will still have to make up any missed matching contributions, regardless of the length of the failure.”

The new, less expensive method for correcting automatic enrollment failures is similar. Plan sponsors may be able to make corrections without making any contribution for missed deferrals. Ability to do so will depend on when the failure is discovered and corrected, and the sponsor will still have to make up missed matching contributions, Clark says.

She adds that plan sponsors are incentivized to review their plan administration and make necessary corrections, as VCP filing fees have been reduced for the more common required minimum distribution and loan errors.

“The updates to the EPCRS set in Revenue Procedure 2015-28 are great news for both plan sponsors and advisers,” says Jamie Kertis, retirement plan specialist, Grinkmeyer Leonard Financial. She notes that it eases the administrative burden of adding automatic enrollment.

Kertis observes a trend where plan sponsors add automatic enrollment because they care about the retirement readiness of their employees and want to do what they can to encourage participation. In cases where sponsors do not choose automatic enrollment, the feeling of responsibility to encourage retirement readiness persists, however the sponsor is weary of the cost and time burden associated with potentially operating the provision incorrectly. “The update to EPCRS should go a long way in helping those cautious plan sponsors make the decision to go forward with adding automatic enrollment,” she contends.

With regard to Revenue Procedure 2015-27, Kertis believes plan sponsors will be encouraged to complete VCP for mistakes. She says the update should help plan sponsors whose recordkeeping or payroll system failed them when determining the 415(c) limits, adding that the 9 1/2-month correction time frame should ease some of that burden.

With a word of caution, Kertis reveals she would have liked to see additional leeway in Revenue Procedure 2015-28 with reference to the employer match. “There will still be an administrative time cost and financial impact to requiring a plan to make up the missed match for the period of time the deferral was not withheld,” she explains. “In a time where we are finally starting to see employer matches return, I do not like to see any regulation that discourages the use of an employer match.”

Compliance May 8, 2015

Clients Must Be Proactive on Eligibility to Sponsor 403(b) Plan

Only certain tax-exempt employers are eligible to sponsor an Internal Revenue Code Section 403(b) plan, and a given employer’s exemption must be carefully protected through proper documentation and reporting practices.
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The Internal Revenue Service (IRS) Employee Plans Compliance Unit conducted a project related to 403(b) plan sponsorship eligibility for organizations that lost their 501(c)(3) exempt status due to the automatic revocation for not filing a required return for three consecutive years.

Some entities were unaware that their 501(c) status affected their eligibility to sponsor a 403(b) plan.

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Generally, all entities exempt from federal income tax under Internal Revenue Code Section 501(a) are required to file an annual return reporting their operations and activities under Internal Revenue Code (IRC) Section 6033. Exempt entities must file an annual notice with the IRS using a Form 990 series return (IRC Section 6033(j) as added by the Pension Protection Act of 2006). The exempt status of entities that don’t file a required return or notice for three consecutive years is automatically revoked.

The Internal Revenue Service issued a reminder for tax-exempt organizations that many have a filing deadline for Form 990-series information returns in mid-May. Form 990-series information returns and notices are due on the 15th day of the fifth month after an organization’s tax year ends. Many organizations use the calendar year as their tax year, making Thursday, May 15, the deadline for them to file for 2014.

The Pension Protection Act of 2006 mandates that most tax-exempt organizations file annual Form 990-series informational returns or notices with the IRS. The law, which went into effect at the beginning of 2007, also imposed a new annual filing requirement on small organizations. Churches and church-related organizations are not required to file annual reports.

Small tax-exempt organizations with average annual receipts of $50,000 or less may file an electronic notice called a Form 990-N (e-Postcard), which asks organizations for a few basic pieces of information. Tax-exempt organizations with average annual receipts above $50,000 must file a Form 990 or 990-EZ depending on their receipts and assets. Private foundations file a Form 990-PF.

Organizations that need additional time to file a Form 990, 990-EZ or 990-PF may obtain an extension. No extension is available for filing the Form 990-N (e-Postcard).

The IRS offers an online search tool, Exempt Organizations Select Check, to help users more easily find key information about the federal tax status and filings of certain tax-exempt organizations, including whether organizations have had their federal tax exemptions automatically revoked.

If a plan sponsor received a CP120A Notice, its organization’s tax-exempt status has been revoked for failure to file a Form 990 series return for three consecutive years. The organization may be able to apply to have its exemption reinstated by completing Form 1023 or Form 1023-EZ. It must file an application for reinstatement even if it wasn’t originally required to complete one for tax-exempt status. To continue to maintain 403(b) eligibility sponsorship, the organization should request a retroactive reinstatement.

Tax-exempt employers that may sponsor a 403(b) plan are:

  • Tax-exempt organizations established under IRC Section 501(c)(3);
  • Public school systems;
  • Cooperative hospital service organizations;
  • Uniformed Services University of the Health Sciences Civilian faculty and staff;
  • Public school systems organized by Indian tribal governments;
  • Certain ministers employed by a 501(c)(3) organization, self-employed or not employed by a 501(c)(3) organization, but functioning as a minister in their daily responsibilities with their employer, such as a hospital chaplain.

The IRS notes that an organization may meet more than one of the these criteria, so even if it loses its 501(c)(3) status, it may still be eligible to sponsor its 403(b) plan under another category.

More information is here.

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