mission impossible? - asppa
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Mission Impossible? Fixing Issues That Don't Qualify For EPCRS –The Voluntary Closing Agreement Program /
EPCRS VCP Update
Thelma Diaz Marcel WeilandInternal Revenue Service Chang Ruthenberg & LongEl Monte, CA Folsom, CA(626) 312-3678 (916) 357-5660
Overview
• EPCRS Overview / EPCRS Update
• Issues Not Covered By EPCRS
• VCA Program
• VCA Case Studies
EPCRS Overview
• General description of its 3 parts as contained in Revenue Procedure (Rev. Proc.) 2013-12
• Changes in the recently published Rev. Proc. 2015-27 and Rev. Proc. 2015-28
EPCRS: The "What"
• A comprehensive system of correction programs to preserve the tax qualified status of plans
• Covers qualified plans, 403(b) plans, SEPS and Simple IRAs that haven't met applicable Internal Revenue Code requirements for a period of time
• Latest version in Rev. Proc. 2013-12 and supplemented by Rev. Proc. 2015-27 and Rev. Proc. 2015-28
Three Components
Self Correction
Program
Voluntary Correction
Program
Audit Closing
Agreement Program
Three Components
• SCP– Correction of certain plan failures (significant
within 2 years, insignificant at any time); no fee or sanction paid; no IRS contact
• VCP– Any time before IRS audit, plan sponsor can pay
limited fee, submit application for compliance statement and receive IRS approval for correction
• Audit CAP– Plan sponsor pays a fee and corrects plan failure
while plan is under audit
Four Categories of Failure Covered
• Plan was not operated according to plan document Operational
• Document doesn't comply with Code; includes failure to timely adopt required amendments
Plan Document
• Plan fails minimum coverage, minimum participation or nondiscrimination testing
Demographic
• Employer not eligible to sponsor a certain type of retirement plan
Employer Eligibility
General Correction Principles
• Correction restores plan and participants to same position they would have been in with no failure occurring
Restoration Of Benefits
• Depending on failure type, more than one correction method may be reasonable and appropriate
Reasonable And
Appropriate
• Correction and earnings determination methods should be applied consistently for all such failures, and correction consistent with published IRS guidance
Consistency
SCP
• Plan sponsors with established procedures and current determination letter can correct operational failures without seeking IRS approval
• Can only correct certain limited failures by retroactive plan amendment, e.g.:– Hardship distributions or plan loans
– Early inclusion of otherwise eligible employees before meeting age/service requirements
SCP
• Can correct any significant failure by end of second plan year after year in which failure occurred, e.g.:
– Plan year 2014 failure corrected by end of 2016 plan year
• Can correct insignificant failure at any time (facts and circumstances test)
• Important to document decision
SCP
• If in later audit IRS doesn't agree that failures were insignificant, and if corrections were made more than 2 years after occurrence, goes into Audit CAP with sanction amount due
VCP
• Eligible any time before audit
• Compliance fee is based on number of plan participants and until 1/31/16 ranges from $750 to $25,000 (see later slide) ($375 for late good faith amendment)
• Can correct operational, demographic, plan document or employer eligibility failures
VCP Applications
• Description of failures
• Description of the proposed corrections
• Calculations of corrective contributions (if any)
• Relevant pages of plan documents relating to failures
Audit CAP
• Used by plan sponsors to correct qualification failures discovered during IRS audit or during determination letter application
• Correction will be consistent with EPCRS' principles
Audit CAP
• Plan sponsor must pay sanction of negotiated % of "maximum payment amount" (approximation of taxes that could be collected if plan disqualified)
• The sanction amount will not be excessive and will bear a reasonable relationship to nature, extent and severity of the failures based upon several factors listed in EPCRS Rev. Proc.
Audit CAP
• Non-amender failures discovered and corrected during determination letter submission are subject to separate sanction chart ranging from $2,500 to $80,000
Correcting Plan Overpayments
Rev. Proc. 2013-12 corrective actions include:• The Plan taking reasonable steps to have the
overpayment (adjusted for interest) returned by the participant
Rev. Proc. 2015-27 clarifies the availability of alternative corrections. Options include:
• Employer or other person makes contribution• Retroactive amendment• Condition: Follow correction principles
Self-Correcting Excess 415 Annual Additions
Rev. Proc. 2013-12
• Return excess elective deferrals within 2-½ months after end of limitation year
Rev. Proc. 2015-27
• Extends the correction period for correcting excess annual additions from 2-½ months to 9-½ months
VCP Fees: Failure to Make Required Minimum Distributions (RMD) That Would
Cause IRC 4974 Excise Tax (sole failure)
VCP Fees: Participant Loans Not Satisfying IRC 72(p) (sole failure)
Rev. Proc. 2013-12• Failure can’t impact more than 25%
of participants• Fee is 50% of regular fee schedule,
based on number of plan participants
Rev. Proc. 2015-27• Failure can’t impact more than 25%
of participants• Fees based on the number of
participants with loan failures
Model VCP Documents Revenue Procedure 2015-27
• Form 14568 (primary form to describe failures, corrections, etc.)
• Forms 14568-A thru 14568-I (the schedules)
• Letter 5265 (IRS Acknowledgement Letter)
• Forms/Letter replace Appendices C and D
Miscellaneous Changes Revenue Procedure 2015-27
• Clarifies determination letter submission requirements with VCP submissions
• Extends time for adopting certain plan amendments
• Reflects elimination of Social Security Administration letter forwarding program
Revenue Procedure 2015-28Highlights
• New safe harbor correction for the failure to implement election for 401(k)/403(b) plans with automatic enrollment
• New safe harbor corrections for elective deferral failures corrected within a short time (all 401(k)/403(b) plans)
Safe Harbor Correction for Failure to Implement Election for 401(k)/403(b) Plans
With Automatic Enrollment
• No QNEC required to correct the missed deferral opportunity if the failure corrected within 9-½ months after plan year end of failure, and satisfy the following conditions:
– Correct elective deferrals begin – generally, by 9-½ months after plan year end of when failure first occurred (Earlier- if employee notifies)
– Timely Notice to employee – Notice must satisfy the content requirements and given within 45 days of when the correct elective deferrals begin
Safe Harbor Correction for Failure to Implement Election for 401(k)/403(b) Plans
With Automatic Enrollment (continued)
• Corrective contributions for missed matching contributions– Must make by end of the 2nd year following the
year of failure (due date for correcting significant operational failures under SCP). Adjust for earnings
– New earnings safe harbor: Plan's default investment alternative - don't reduce for losses
• Sunset – not available for failures occurring after 2020
What if All the Conditions Are Not Met?
May be able to use the safe harbor correction method under Rev. Proc. 2013-12
• Missed Deferral Opportunity:
50% Qualified Nonelective Contribution (QNEC)
• Missed matching contribution:
Corrective Employer Contribution to replace match
• Earnings
Safe Harbor Corrections for Elective Deferral Failures Corrected Within Three Months
(all 401(k)/403(b) plans)No QNEC required to correct for the missed deferral opportunity if the failure is corrected within 3 months and the following conditions are satisfied:
• Timely commencement of correct elective deferrals –generally within 3 months of the date when the failure first occurred (Earlier – if employee notifies)
• Timely Notice to employee – Notice must satisfy the content requirements and be provided to the employee within 45 days of the commencement of correct elective deferrals
Safe Harbor Corrections for Elective Deferral Failures Corrected Within Three Months
(all 401(k)/403(b) plans) (continued)
Corrective contribution for missed matching contributions -• Must be made by the due date for correcting
significant operational failures under SCP • In most cases that is the end of the 2nd year
following the year in which the failure occurred• Corrective contributions should be adjusted for
earnings• New Earnings safe harbor: Plan's default
investment alternative. No reduction for losses
Safe Harbor Corrections for Elective Deferral Failures Corrected Before the End of the SCP
Period (all 401(k)/403(b) plans)Corrective QNEC =25% of the missed deferrals, if the following conditions are met:• Timely commencement of correct elective
deferrals – generally no later than the last day of the 2nd plan year following the plan year in which the failure occurred (Earlier – if employee notifies)
• Timely Notice to employee – Notice must satisfy the content requirements and be provided to the employee within 45 days of the commencement of correct elective deferrals
Safe Harbor Corrections for Elective Deferral Failures Corrected Before the End of the SCP
Period (all 401(k)/403(b) plans) (continued)
Corrective contributions for missed matching contributions-
• Made by the due date for correcting significant operational failures under SCP. In most cases that is the end of the 2nd year following the year in which the failure occurred
• Corrective contributions should be adjusted for earnings
• New earnings safe harbor: Plan's default investment alternative. No reduction for losses
New Fees for Regular Submissions Under VCP for Qualified Plans and 403(b) Plans
Effective February 1, 2016, Rev. Proc. 2016-8
Rev. Proc. 2013-12 Rev. Proc. 2016-8Number of
ParticipantsFees
20 or fewer $750
21 to 50 $1,000
51 to 100 $2,500
101 to 500 $5,000
501 to 1,000 $8,000
1,001 to 5,000 $15,000
5,001 to 10,000 $20,000
Over 10,000 $25,000
Number of Participants
Fees
20 or fewer $50021-50 $75051-100 $1,500101-1,000 $5,0001,001-10,000 $10,000Over 10,000 $15,000
Issues That Are Not Covered by EPCRS
• Diversion or Misuse of Plan Assets – (See section 4.12 of Rev. Proc. 2013-12)
• Abusive Tax Avoidance Transactions (See section 4.13 of Rev. Proc. 2013-12)
• Matters Subject to Excise or Other Taxes (See section 6.09 of Rev. Proc. 2013-12)– EPCRS not available for events for which the Code provides tax
consequences other than plan disqualification (such as the imposition of excise or additional income tax) including:
• Funding deficiencies due to failures to make required contributions under Code section 412
• Prohibited transactions• Failure to file Forms 5500
EP Voluntary Closing Agreements (VCA)
• IRS announced in Employee Plans News, issue 2013-10, 12/19/13
– http://www.irs.gov/pub/irs-tege/epn_2013_10.pdf
– Authorized by Delegation Order 8-3
• A uniform system for handling requests in EP Voluntary Compliance
– For issues that are not eligible for EPCRS
What is a Closing Agreement?
• A final agreement between the IRS and a taxpayer to resolve a tax issue authorized under Internal Revenue Code section 7121
• It can only be changed due to fraud, malfeasance, or misrepresentation of material fact
• Issued in discretion of IRS Commissioner
What is the Rationale for Closing Agreements?
• May be entered into if:
– Benefit in having the case permanently and conclusively closed; or
– Good and sufficient reasons by the taxpayer for desiring such an arrangement; and
– Not detrimental to the United States
In What Situations is VCA Appropriate?
• Income or Excise Tax
• Plans: – QPs 401(a),QPs with GACs, 403(a), TSA 403(b), SEP
408(k), Simple 408(p)
– No 457 plans• 457(b) use EPCRS
• 457(f) expressly excluded
– IRAs under 408?
• Not under audit/investigation
• Not willful or abusive avoidance
Guidelines for Submitting VCA Request
• In most cases, IRS won't negotiate over income or excise tax amounts but may discuss penalty abatement
• For ERISA covered plans, any prohibited transactions should be corrected in DOL Voluntary Fiduciary Correction Program first
• All actions listed in the closing agreement must be completed before it is signed
Guidelines for Submitting VCA Request
• A VCA request does not prevent an IRS exam of plan or plan sponsor
• If plan or plan sponsor is examined after submitting VCA request, then EP Voluntary Compliance will consult with exams to see if issue should be precluded from exam – not available for anonymous requests
Guidelines for Submitting VCA Request
• A VCA is not appropriate to address a future event that may impact tax-favored status of plan or seek guidance on issues or actions that may impact retirement plan
• If there is willful or intentional plan to avoid paying or reporting taxes, EP reserves right to refer the VCA request to exams
Procedure for VCA
• Letter to Gina Jacquez• Explain:
– Eligibility– Details of problem– Correction– How tax, penalties and interest were calculated– Proposed sanction and how calculated
• Signed by authorized individual• May be anonymous• No user fee
What Should Taxpayer Show?
• To increase the likelihood that the IRS will enter into a voluntary closing agreement, a taxpayer should be prepared to show:– the taxpayer is willing to furnish necessary facts and
documentation to establish its tax liabilities
– the agreement is in the best interest of both the IRS and the taxpayer
– the federal government will suffer no disadvantage from entering into the closing agreement, and
– any Internal Revenue Code violation or tax deficiency was unintentional
Case Study ESOP Plan
• The employer elected to report its revenues and expenses as a Subchapter S Corporation, pursuant to Code section 1361, for Federal income tax purposes
• The TPA determined that all allocations of S Corp Distributions for the plan years ended December 31, 2011 through December 31, 2014 was inconsistent with the terms of the Plan. Consequently, participants did not receive sufficient allocations of S Corp Distributions
• When the TPA reallocated in accordance with the terms of the plan, it was determined that the Plan failed Code section 409(p) for the 2013 plan year with the following consequences:- The Plan was no longer qualified under Code section 401(a), and- The Employer became subject to excise tax under Code
section 4979A as of December 31, 2012
Case Study401(k) Plan
• The employer set up a trust but did not sign the adoption agreement
• The employer employed approximately 70 employees• The owner and about 3 employees made elective deferrals• The owner deferred about $1,000 the first year and $400
the second year. The NHCE all together deferred less than $400. No other contributions were made
• In the first plan year the plan failed the ADP test and the plan was considered top heavy
• The employer would have to make a $14,000 top-heavy contribution and distribute the excess to meet the ADP test
Case StudiesNon Compliance with Reporting
Requirements The plan sponsor properly made annuity payments to participant but failed to:• File with the Service, Form 1099-Rs for certain
participants, resulting in a penalty of $50 per participant (Code section 6721)
• Issue Forms 1099-Rs for certain participants for distributions received resulting in a penalty of $50 per participant (Code section 6722)
• Withhold 20% of the amount distributed, as required under Code section 3405(c) for participants who did not elect to have such distributions paid directly to an eligible retirement plan
Case StudyService Provider
The provider served as an investment advisor for retirement plans
• The provider was considered a disqualified person as defined in Code section 4975(e)(2)(A)
• Due to the coding error, the provider directly or indirectly received certain fees or other payments with respect to certain retirement plan accounts that constituted prohibited transactions under Code section 4975(c)(1)(E)
Case StudyService Provider
The service provider concluded that some IRA Accounts were improperly administered. As a result, the provider did not distribute sufficient amounts from the IRAs to satisfy the required minimum distributions under Code section 408(a)(6)
Case StudyPlan Administrator
• The plan allowed for participant loans• Due to an error in the administrator's program, the
loan payments were not sufficient to pay the loans in full by the end of the 5-year period
• Under 72(p), the loans are consider deemed distributions
• The participant paid the loans in accordance with the payment schedules
• The plan administrator agrees that the loans should be considered deemed distributions, however request that the Service not require the issuance of forms 1099-R
What is Out There?
• The Service is interested in knowing about problems/issues and involving retirement plans that cannot be resolved under EPCRS
• Problem/issues that affect:- Retirement plans (401(a), 403(b) 408(a),
401 (k))- Plan sponsors - Plan administrators- Service providers
