The Internal Revenue Service has released new guidelines for fixing employee benefit plan problems.
The new guidance, which appears in IRS Revenue Procedure 2008-50, affects plan sponsors and others that want to use the IRS Employee Plans Compliance Resolution System.
The system permits employers to fix some errors themselves, without telling the IRS, through a Self-Correction Program; offers a Voluntary Correction Program for correcting more serious errors detected before an IRS audit; and offers an Audit Closing Agreement Program for plans that agree to fix problems discovered during an audit.
Users of the Voluntary Correction Program must pay small fees and get IRS approval, and users of the Audit CAP system have to get IRS approval and “pay a sanction based on the nature, extent and severity of the failure being corrected,” officials say.
The guidance will expand the Self-Correction Program, to open it to employers that discover during an IRS examination that operational errors have been only partially corrected, officials say.
The guidance also establishes new Voluntary Correction Program application procedures, in an effort to streamline use of the system for plans affected by loan problems, failures to make minimum distributions to participants, excessive elective deferrals, failures to incorporate law changes, and other problems, officials say.
Another section of the guidance makes it easier to correct loan failures under the Voluntary Correction Program. In some cases, the fee for correcting loan failures would be reduced by 50%.
The IRS asks in the guidance for public comments about ways to improve the compliance resolution system.
Officials also ask for comments about how the compliance resolution system should handle problems with 401(k) plan automatic enrollment programs and designated Roth contributions.
Officials ask commenters to discuss how the IRS ought to handle plan sponsors that fail to withhold 401(k) plan contributions from employees in automatic enrollment programs, and also how to handle failures to provide safe harbor notices in a timely fashion.
For designated Roth contributions, comments are “requested on whether, if a plan failed to implement a participant’s election to have a designated Roth contribution made on his or her behalf, but instead a pre-tax elective deferral was made for the participant with the participant’s compensation reduced accordingly, would it be an appropriate correction for the failure for the employer to ask the participant whether correction should be made by a transfer of the contribution (with earnings) to a Roth account and inclusion of the amount so transferred in the participant’s compensation in the year of the transfer?”
The alternatives might be to require a similar transfer with a corrected W-2 for the year of the failure, and to have the participant complete an amended return for the year of the failure, or to require a similar transfer and include the amount transferred in the participant’s compensation in the year of the transfer, officials say.
If the second alternative were adopted, the employer would have to make a “gross up” payment to the participant to make the participant whole for the resulting income tax, officials say.
“Comments are also requested regarding cases in which a plan fails to notify an employee of his or her right to elect designated Roth contributions,” officials say.