In a January Alert
, we advised you that the long-awaited update to the IRS retirement plans correction procedure, Rev. Proc. 2013-12, had been issued. As the baseball teams have reported and we are eagerly looking for signs of spring, it seems appropriate to use a baseball metaphor to describe the new procedure. The roster is all different, although there are some familiar names along the way. The opening day for Rev. Proc. 2013-12 is April 1, 2013. On that date, the old Rev. Proc. 2008-50 is out and the new is in and must be followed in its entirety. The good news is that the new procedure is broader, more flexible and more user-friendly.*
In the interim through March 31, 2013, correction submissions can be made under Rev. Proc. 2008-50 or Rev. Proc. 2013-12 but must be entirely in conformity with one or the other, including a new mailing address
Collectively, the correction programs are known as the Employee Plans Compliance Resolution System (EPCRS). EPCRS provides for correction of most compliance failures in retirement and annuity plans, Simplified Employee Pension plans and SIMPLE IRAs. The programs have evolved over more than 20 years into an extensive and widely used framework for correction. There are three components of EPCRS. The Self Correction Program (SCP) has no compliance fee and no contact with the IRS. The Voluntary Compliance Program (VCP) requires a filing with the IRS and payment of a significant fee based on the number of participants. The Audit Closing Agreement Program (Audit CAP) results from an examination or a compliance failure discovered during a Determination Letter application and often results in a hefty penalty sanction.
New Forms Required
Effective April 1, all VCP submissions must include two new forms: Form 8950 (Application for Voluntary Correction Program) and Form 8951 (Compliance Fee for Application for Voluntary Correction Program). At this point, these forms are only available on the Internet. You can access Form 8950 here
and the instructions here
. Form 8951 is available here
Form 8950 includes employer representations (penalty of perjury; abusive tax avoidance; diversion of plan assets; not under examination; and determination letter) and other information previously on other components of a VCP submission. Form 8950 includes a procedural requirements checklist. The checklist is not mandatory but will be very helpful. Generally, Form 8950 must be signed by the owner or an authorized employee of the plan sponsor. It cannot be signed by an authorized representative under a Power of Attorney.
This form must be attached to Form 8950. It determines the VCP compliance fee. It is comparable to Form 8717 applicable to Determination Letter and other advisory letter submissions.
Where to File
All VCP submissions, non-VCP submissions related to Section 457(b) plans and any related Determination Letter application, if applicable, must be sent to:
Express Delivery Service:
Internal Revenue Service
P.O. Box 12192
Covington, Kentucky 41012-0192
Internal Revenue Service
201 West Rivercenter Boulevard
Attn: Extracting Stop 312
Covington, Kentucky 41011
What to Include
Section 11.14 of Rev. Proc. 2013-12 contains the assembly instructions for a VCP filing. It references the new forms and also makes clear that if a VCP submission must be accompanied by a Determination Letter application, separate copies of any documents that are common to both filings must be provided.
Appendices C, D, E and F, as we have known them under Rev. Proc. 2008-50 for the last five years, no longer apply. Appendices C and D have been completely revised. Appendices E and F no longer exist.
The new Appendix C consists of Part I: Model VCP Submission Compliance Statement; and Part II: Model VCP Schedules 1-9. Submission of Part I may be voluntary but should be considered a requirement. It can be combined with any of the Part II schedules.
The Schedules 1-9 in Part II of Appendix C are similar to the Schedules listed in Part II of the former Appendix F. However, they have been revised and clarified. Completion of some of the schedules now will require more effort.
More comprehensive information is now required concerning the efforts made to locate former participants and former beneficiaries. This information must coordinate with the new procedure and the Appendix C compliance statement.
Appendix D, Acknowledgement Letter, is the same as and now replaces the former Appendix E.
Under Rev. Proc. 2013-12, the full scope of EPCRS has been extended to the correction of document and operational failures with respect to Section 403(b) plans that fail to comply with the final 403(b) regulations for 2009 and subsequent plan years. The definitions and principles applicable to 403(b) plans have been modified or added and are substantially identical to those for qualified retirement plans. Sections 6.10(2) and (3) now contain additional correction principles and rules that are uniquely applicable to 403(b) plans. If the only purpose of the VCP submission is to correct failure to adopt a written 403(b) plan by the deadline in the final 403(b) regulations and Notice 2009-3 and the submission is postmarked no later than December 31, 2013 (see Form 8951), the VCP compliance fee will be reduced by 50%. Any VCP submission concerning a 403(b) plan submitted under Rev. Proc. 2008-50 that was not closed or returned by December 31, 2012, will be given the option to convert to the Rev. Proc. 2013-12 requirements.
Section 457(b) Plans
Under Rev. Proc. 2008-50, corrections to Section 457(b) plans were limited to those sponsored by governmental organizations and were not available to plans of tax-exempt entities. Under Rev. Proc. 2013-12, the IRS may consider a submission for a plan sponsored by a tax-exempt organization if the plan was erroneously established to benefit non-highly compensated employees and has been operated in a manner similar to that required for a qualified retirement plan.
Funding Corrections with QNECs
Where a non-discrimination test failure (ADP, ACP or multiple use) is to be corrected by qualified non-elective contributions (QNECs), the amounts must satisfy the definition of QNECs in Section 1.401(k)-6 of the 401(k) regulations. This means that a QNEC correction cannot be funded by forfeitures.
The new procedure finally makes completely clear that funding of earnings for loss of use of underpayment amounts in a defined benefit pension plan must be based on the interest rate in effect for determining actuarial equivalence at the time the distribution should have been made and should not be based on any other standard. The new procedure also makes clear that corrective distributions are not subject to the lump sum equivalence requirements of Code Section 417(e)(3) if the underpayments or missed payments themselves were not subject to Section 417(e)(3). This could occur, for example, if regular monthly pension payments either started late or were less than they should have been.
Plans Subject to Section 436 Restrictions
Rev. Proc. 2013-12 addresses the application of correction principles and procedures to defined benefit pension plans that are subject to benefit payment restrictions due to underfunding under Code Section 436. Generally, corrections to plans subject to Section 436 restrictions can be made only to the extent paid for by corresponding employer contributions.
The new procedure recognizes that the IRS letter forwarding program was terminated effective as of August 31, 2012. It suggests alternatives including commercial services. As noted above, the VCP submission rules now require an enhanced description of efforts to locate missing participants. The procedure makes clear that a correction will not fail if reasonable steps are taken and the benefits will be available if the participant or a bona fide beneficiary is located subsequently.
A number of provisions in the new procedure make clear that the correction principles also apply when a correction is being made through Audit CAP.
Determination Letter Requirement
Section 6.05 of the new procedure brings welcome clarification of when a separate Determination Letter application must be included with a VCP submission.
The new procedure includes a number of additional discounted and flat fees for VCP submissions and CAP fees arising out of Determination Letter applications.
Appendices A and B
Rev. Proc. 2013-12 makes clear that correction methods permitted in Appendices A and B are deemed reasonable and appropriate, making them safe harbor methods of correction. Other correction methods may be reasonable and appropriate but must conform to the general correction principles.
Appendix A, Section .05, allows correction of matching contribution failures to be made in the form of corrective employer matching contributions instead of QNECs. Corrective employer matching contributions may be subject to any applicable vesting schedule.
Appendix A also has been modified in several circumstances to add safe harbor corrections for improper exclusions of employees from certain plans. These safe harbor corrections do not require or permit new ADP or ACP testing.
While most aspects of the EPCRS as set forth in the revenue procedures are technical expressions of the rules for and permissible methods of correction, plan sponsors should be pleased with the updates in Rev. Proc. 20013-12. As noted in our earlier Alert, the existence of EPCRS and its SCP and VCP components should strongly encourage plan sponsors to conduct or engage others to conduct self-audits of the internal management and administration of their qualified retirement plans and other eligible plans with emphasis on uncovering and correcting any compliance failures. Most ERISA fiduciary responsibility specialists today believe that it is a breach of ERISA fiduciary responsibility for qualified plan fiduciaries to fail to monitor compliance with applicable qualified plan requirements and, when a compliance failure is discovered, to fail to carefully consider utilization of one of the applicable correction programs. The members of the Warner Norcross & Judd LLP Employee Benefits and Executive Compensation Practice Group stand ready to assist you in the design and implementation of a compliance review program for your eligible plans and for considering and implementing an applicable correction method when appropriate.
In preparing this article, the author acknowledges and has drawn heavily upon the presentation by the IRS Tax Exempt & Government Entities division on February 21, 2013, of a Phone Forum entitled, “Changes to the Employee Plans Compliance Resolution System (Revenue Procedure 2013-12)” and the related PowerPoint slide presentation that can be found here