EPCRS Part 1 - The Joy of Self-Correction Alison J. Cohen, Esq., CPC Ferenczy Benefits Law Center 1
What You Can Expect A Review of EPCRS Principles and Terms Understanding the Self-Correction Program (SCP) Knowing when to properly use SCP Case studies for your consideration Shock, dismay, and possibly some nausea 2 2
EPCRS: The Framework Employee Plans Compliance Resolution System Rev. Proc. 2016-51 released September 29, 2016 Effective January 1, 2017 Modified and superseded Rev. Proc. 2013-12 Incorporates Rev. Procs. 2015-27 & 2015-28 3 3
Four Types of Qualification Failures Plan Document Failures Terms of plan not qualified Failure to timely adopt interim amendment/restatement Demographic Failures Failure to satisfy 410(b) or 401(a)(26) 4 4
Four Types of Qualification Failures Employer Eligibility Failures Not eligible to establish type of plan (e.g. government 401(k) or ineligible for 403(b)) Operational Failures Not following the terms of the plan (i.e. usually everything else you encounter) Other than prohibited transactions: exclusive benefit violations 5 5
Consequences of Disqualification Taxation (IRS refers to this in EPCRS as Maximum Payment Amount) Employer deductions lost if no inclusion in employee income Trust is taxable (earnings may be taxable) Employees taxed on amounts not subject to risk of forfeiture Exception: If sole failure is 410(b) coverage or 401(a)(26) participation failure, then only HCEs taxable 6 6
How Do You Correct? EPCRS (Rev. Proc. 2016-51) contains pre-approved correction methods Following these methods is safe Otherwise, find reasonable, appropriate method Use Code, Regs, and EPCRS as guide Correct discrimination failures by giving $ to NHCEs Note: the farther you get from pre-approved methods, the more beneficial it is to ask for IRS approval 7 7
Correction Principles Must correct all taxable years (even if closed) Restore plan and participants to position they would have been in had the failure not occurred Should be reasonable and appropriate Appendix A & B solutions deemed reasonable Consistent with Code (don t create another violation) Provide benefits to NHCEs Keep assets in the plan Consideration of other agencies (e.g. DOL on abandoned plans) 8 8
Exceptions to Full Correction Unreasonable or not feasible (tough one to apply) Reasonable estimates are necessary (e.g. earnings) Distribution of small amounts ($75 or less) Recovery of small overpayments ($100 or less) Lost Participants Small excess allocations ($100 or less) 9 9
Lost Earnings Corrective contributions, allocations, or distributions must be adjusted for earnings Don t have to adjust for losses, but can Assume that the date on which the earnings begin Date on which contributions/forfeiture would have been allocated to the participant s amount For salary deferrals and after-tax contributions, assume mid-point of plan year (or period of exclusion) 10 10
Lost Earnings Methods for determining earnings: Generally, use actual earnings based on EEs investment choices Reasonable estimates of investment returns Multiple investment options option with highest rate of return (if most affected EEs are NHCEs) If EE has no investment selections weighted average Can the DOL s online calculator be used? 11 11
EPCRS Structure Three correction procedures: Self Correction Program (SCP) Insignificant errors: anytime Significant errors: time limited Voluntary Correction Program (VCP) Forms 8950, 8951, 14568, etc. Cannot be under examination Audit Closing Agreement Program (CAP) 12 12
Self-Correction Program Insignificant Failures CORRECTION MAY BE MADE AT ANY TIME Even if the plan is under audit by the IRS 13 13
Self-Correction Program What is insignificant? Balancing of factors: Have other failures occurred? Percentage of plan assets and contributions involved Number of years involved Number of participants affected (as percentage of total in plan and as percentage of those who could have been affected) Was correction made within a reasonable time after discovery? Why did the failure happen? 14 14
Self-Correction Program Defined: anything that is not significant Rule: must be substantially corrected during the correction period Correction Period: General Rule: last day of the 2 nd plan year following year of occurrence ADP/ACP: last day of 3 rd plan year following year for which testing is failed 15 15
Can Self-Correction Work? Remember timing rule: If insignificant failure, can correct any time If significant failure, have until last day of the 2 nd year following the year of failure (and ADP/ACP testing failure is deemed to happen at end of testing year) Can we be sure a failure is insignificant? Rule of thumb: get things corrected within 2-year correction period or at least consider VCP ing the rest unless they are obviously insignificant 16 16
Self-Correctable Failures Do we have any (let s identify them)? Do we have the requisite requirements? FDL or equivalent? Policies and procedures? No exam by IRS notice Options under Self-Correction Correct IRS approved correction? Unapproved correction? Don t correct 17 17
What if Errors Are Not Self-Correctable Under EPCRS? Option 1: VCP Option 2: Correct with no filing Option 3: Don t correct 18 18
General Guide for EPCRS Correction If there is an IRS-approved correction available, that is where to start Rev. Proc. 2016-51, Section 6, Appendices A & B Use that, unless there is a reason not to do so Too impractical Too expensive Very unpopular to rank-and-file Check out informal IRS guidance that is available IRS answers to Q&As What other practitioners have experienced 19 19
General Guide for EPCRS Correction If you have to formulate your own correction, remember the correction principles discussed on slides 8 9 So, for each failures discovered, what are the: IRS pre-approved corrections Probably IRS preferred corrections What we would like to do if permitted 20 20
Let The Case Studies Begin! 21 21
Isn t a date a piece of fruit? Client is moving from bundled to TPA solution TPA receives PPA documents from bundled vendor PPA restatement effective January 1, 2015 PPA restatement is signed, but no dates Is the PPA restatement acceptable? If not, can we self-correct? 22 22
Missed it by thaaat much Client changes payroll vendors as of January 1, 2017 During the transition, new payroll vendor misses the set-up of the loan repayments Missed repayments caught in July 2017 during the 2016 audit for the Form 5500 Can the Employer go back and make up the missed repayments? 23 23
You mean bonuses are included? Employer likes to give $100 holiday bonuses every December to all employees and has been doing so for years Employer never withholds 401(k) from holiday bonus Plan becomes a large plan and this is discovered by auditor Can we fix this under SCP? Is it insignificant? 24 24
Let me give you a tip Employer runs a ski resort with 200 eligible employees for the 401(k) plan Employer s payroll accidentally doesn t include tips for calculating 401(k) withholding Never caught by auditor for 5 years What do you want to know to evaluate SCP options? 25 25
Let me give you a tip (cont.) Out of 200 eligible employees, only 6 are affected on average per year All affected employees are NHCEs Plan has $3.5m in assets Average annual tips are $10,000 Plan has no other operational failures identified It will be very difficult to get data earlier than 2014 26 26
Questions? 27 27
Alison J. Cohen Ferenczy Benefits Law Center 2200 Century Parkway, Suite 560 Atlanta, Georgia 30345 (678) 399-6604 (V) (866) 515-5140 (toll free) (404) 320-1105 (F) acohen@ferenczylaw.com Follow us on Twitter: @ferenczylaw 28