IRS Updates Plan Correction Program Advice

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.