Compliance April 2, 2015

IRS Finds Sponsors Not Completing Plan Correction

Retirement plan sponsors that omit any steps in the voluntary compliance process must reapply for the IRS program and pay a fee.
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The Employee Plans Compliance Unit (EPCU) of the Internal Revenue Service (IRS) conducted a Voluntary Compliance Follow-Up project to determine if plan sponsors completed the corrections they agreed to in their Voluntary Correction Program (VCP) compliance statements.

The agency found 29% of plan sponsors were in violation of the compliance statements or had some other noncompliant issue. The majority of these issues stemmed from failing to make the proposed correction within 150 days from the date the statement was issued.

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When plan sponsors apply to use the IRS’ Voluntary Compliance Program (VCP) and the agency accepts the submission, plan sponsors receive an IRS compliance statement that outlines the plan failures identified, proposed corrections including revisions to administrative procedures, and time allowed to complete the actions. If a plan sponsor doesn’t complete the corrective actions within 150 days of the compliance statement’s date, the compliance statement is invalid. The sponsor will have to file another VCP submission, along with a compliance fee, and identify that they didn’t complete the corrections within 150 days from the date the compliance statement was issued.

Plan sponsors that need additional time to complete the proposed corrections in the compliance statement may request an extension in writing before the 150-day correction period expires.

More information is here.

Compliance April 2, 2015

Remind Plan Sponsors of Transaction Records to Keep

Do your retirement plan sponsor clients know it is up to them to track loans and hardship withdrawals?
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“Even if you use a third-party administrator (TPA) to handle participant transactions, you’re still ultimately responsible for the proper administration of your retirement plan. Make sure you’re keeping up with the recordkeeping requirements,” the Internal Revenue Service (IRS) tells plan sponsors on its website.

Failure to have these records available for examination is a qualification failure that should be corrected using the Employee Plans Compliance Resolution System (EPCRS).

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For hardship withdrawals, the plan sponsor should retain the following records in paper or electronic format:

  • Documentation of the hardship request, review and approval;
  • Financial information and documentation that substantiates the employee’s immediate and heavy financial need;
  • Documentation to support that the hardship distribution was properly made in accordance with the applicable plan provisions and the Internal Revenue Code; and
  • Proof of the actual distribution made and related Forms 1099-R.

The agency says it is not sufficient for plan participants to keep their own records of hardship distributions, and electronic self-certification is not sufficient documentation of the nature of a participant’s hardship. IRS audits show that some TPAs allow participants to electronically self-certify that they satisfy the criteria to receive a hardship distribution. While self-certification is permitted to show that a distribution was the sole way to alleviate a hardship, self-certification is not allowed to show the nature of a hardship.

A plan sponsor should retain the following records, in paper or electronic format, for each plan loan granted to a participant:

  • Evidence of the loan application, review and approval process;
  • An executed plan loan note;
  • If applicable, documentation verifying that the loan proceeds were used to purchase or construct a primary residence;
  • Evidence of loan repayments; and
  • Evidence of collection activities associated with loans in default and the related Forms 1099-R, if applicable.

If a participant requests a loan with a repayment period in excess of five years for the purpose of purchasing or constructing a primary residence, the plan sponsor must obtain documentation of the home purchase before the loan is approved. Again, the agency says participant self-certification of loan eligibility is not sufficient.

This information and additional resources are available on the IRS website.

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