Retirement Plan Compliance Restoration
Is your plan out of compliance? We can help. Retirement plans are complicated. With all the rules surrounding establishing and maintaining a qualified plan, at some point plan sponsors may find themselves in a situation where their plan is out of compliance.
Common Compliance Errors
According to the IRS, the following are common errors in maintaining a qualified plan:
- Failure to update the plan document for required, mandatory law changes
- Failure to follow the terms of the plan document
- Failure to apply the plan’s definition of compensation correctly
- Failure to make employer matching contributions to all the appropriate employees
- Failure to take corrective action for failed ADP and ACP nondiscrimination tests
- Failure to give eligible employees the opportunity to defer into the plan, resulting in lost deferral opportunity
- Failure to limit deferral contributions under Section 402(g)
- Failure to make the required corrective distributions to the affected participants
- Failure to routinely deposit employee elective deferrals in a timely manner
- Failure of participant loans to conform to the requirements of the document and Section 72(p)
- Failure to handle hardship distributions properly
- Failure to make the required minimum employer contributions to the plan when the plan is “top heavy”
- Failure to file the required annual Form 5500 return
Why Compliance is Important
If a plan is out of compliance with IRS or DOL rules it is potentially subject to disqualification. If a plan is disqualified: (1) the trust income is taxable, (2) the employer may only deduct vested contributions, (3) to the extent they are vested, the employer takes contributions into gross income, (4) distributions cannot be rolled over, (5) employer contributions are subject to payroll taxes when vested and (6) the participant is taxed on remaining amounts when they are made available, rather than deferring income until receipt of the distribution.
Because the plan sponsor and its selected representatives take on certain personal fiduciary duties and other legal responsibilities with respect to the plan, simply put, it is extremely important that you fix any compliance issues immediately when they are identified.
The IRS has established the Employee Plans Compliance Resolution System, which has three methods to address errors in the plan:
1. Self-Correction Program (SCP) – to fix an error discovered by plan sponsor or administrator
a. No IRS approval necessary
b. The least costly method of correction
c. No sanctions or filing fees
d. Only expense is to restore the plan and its participant to the position they would have been in had the failure not occurred
2. Voluntary Correction Program (VCP) – to fix an error not eligible for SCP prior to it being identified by the IRS
a. IRS approval required
b. Plan obtains approval by submitting request to IRS
c. Plan pays a significantly smaller compliance fee than Audit Cap – Fee ranges from $1,500 to $3,500
3. Audit Closing Agreement Program (Audit CAP) – to fix an error identified while under review by the IRS
a. Fix the problems the IRS has identified
b. Pay a sanction to the IRS which is based on facts and circumstances
c. Sanction will be greater than the fee paid under (VCP) – Sanction will bear a reasonable relationship to the nature, extent and severity of the failures
d. Enter into a Closing Agreement with the IRS
The plan sponsor can save money by being attentive to the administration and operation of the plan and hiring a knowledgeable and experienced third-party 401K Plan Administrator firm like TRA. Our Plan Administrative Relief Services and Compliance Restoration Program will help you to identify and promptly correct any mistakes in the most cost-effective manner possible.
If you have questions or need additional assistance, please complete the form below.