IRS Eases Pain for Correcting Certain Plan Administration Errors

The IRS acknowledges that retirement plan administrators aren’t perfect and provides for correction of various types of administrative errors. Most recently, the IRS reduced certain penalties, as well as extended deadlines for rectifying specific mistakes.

Background

In 2013, the IRS overhauled the Employee Plans Compliance Resolution System (“EPCRS”). One of the significant changes it made involved instances where a plan inadvertently overpaid participants, the plan must recover those overpayments. Plans have the option of either having affected participants repay the excess, or, in the case of a defined benefit plan, adjusting the accrual rate for future benefits.

However, for many years prior to this change, the U.S. Department of Labor (“DOL”) recognized the need for exceptions when reclaiming excess benefits. For example, if recovering the overpayment would cause financial hardship for aged participants and beneficiaries, particularly when the error was discovered long after it was made.

IRS and DOL Agree

After the 2013 update to the EPCRS, it wasn’t clear whether the IRS agreed with the DOL’s position. As a result, when such a situation arose, many plans followed the IRS stance and required repayment of the excess.

In 2015, the IRS went on record as accepting the DOL position. Therefore, “depending on the facts and circumstances,” plans may not be required to recover the overpaid funds. An example provided by the IRS is when plan sponsors or third party administrators pay the amount of excess funds to the plan from their own resources. The IRS also accepts suggestions for examples of reasonable circumstances when recoupment of the overpayment shouldn’t be required.

Plan Amendments and Determination Letters

The IRS also reminded plan sponsors that, if an amendment to their plans is necessary to address excess benefit payments, they can’t choose to “self-correct” under its correction program. Plan sponsors must have the IRS approval for such an amendment in advance by applying for an IRS determination letter requesting approval of the plan amendment needed to resolve the issue.

A determination letter may not be required for other types of administrative errors. Pursuant to the new procedures, this would apply if an amendment made to a preapproved plan isn’t significant enough to preclude the plan from being able to rely on the preapproved plan’s advisory or opinion letter.

If a plan sponsor is required to apply for a determination letter (and a corresponding correction filing) in order to approve a plan amendment resolving a problem, the sponsor now has the later of 150 days after the compliance statement, or 91 days after the issuance of a favorable determination letter, to adopt the amendment. This doesn’t apply in instances where the plan failed to adopt a change in the law.

Penalties Reduced

Based on a plan’s size, the 2015 EPCRS updates reduced penalty amounts for certain errors. Under the previous policy, some larger plans hesitated about coming clean on smaller mistakes that could have been swept under the rug and fixed quietly. Now plans that have up to 150 participants face a maximum penalty of $500 for errors involving required minimum distributions, compared to the previous cut-off point of 50 participants.

One Last Change

Defined contribution (“DC”) plans that feature only elective deferrals and non-elective employer contributions used to have 2½ months following the plan’s year end to remedy excess contributions. This deadline was extended nine months by the IRS. However, this doesn’t apply to DC plans that make matching contributions. Your benefits advisor can explain more about how your plan may be affected by the reduced penalties and extended deadlines.

Sidebar: Penalty Modified for Failing to Process Participant 401(k) Plan Deferrals

Until recently, the penalty for a plan’s failure to begin deducting and investing 401(k) participants’ elective deferral amounts and accompanying employer matches was 50% of those amounts. The IRS has changed this policy.

According to IRS Revenue Procedure 2015-28, that penalty will no longer apply if certain conditions are met.  First, the correct deferral amounts must begin the earlier of the first payday on or after the last day of the 9½ month period, after the end of the first plan year in which the failure began — or, if the plan sponsor was notified of the failure by the affected eligible employee, the first payday on or after the last day of the month after the month of notification.

Additionally, affected employees must be notified by plan sponsors of the error no later than 45 days after the date that the correct deferrals begin. Finally, the plan must make corrective contributions for any matching contributions, as well as earnings on those contributions that the employee would have otherwise received.

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