The updated Employee Plans Compliance Resolution System (EPCRS)
went into effect April 1. (See
January 4, 2013, Day Pitney alert describing this
update.)
EPCRS, which provides procedures for employers sponsoring
retirement plans to correct certain plan errors, now provides
employers the opportunity to fix incomplete or inaccurate
§403(b) plan documents (known as "Plan Document
Failures") by making a voluntary submission to the IRS. If the
submission is made on or before December
31, 2013, employers may pay
a significantly reduced compliance
fee.
What Is a §403(b) Plan Document Failure?
Effective January 1, 2009, all employers sponsoring §403(b)
plans were required to adopt a written plan document containing
specific terms required under the Internal Revenue Code. This
requirement was generally met if the employer adopted the written
§403(b) plan document no later than December 31, 2009.
Although the rules governing §403(b) plans do not define what
it means to "adopt" a plan, the requirement is typically
satisfied if the written document is adopted in accordance with the
employer's governing procedures, e.g., bylaws, and the plan
document is signed by a duly authorized person. If on IRS audit, an
entity is unable to produce evidence that it properly adopted the
written plan document by December 31, 2009, it may have a Plan
Document Failure, even if the document contains all the required
terms. A Plan Document Failure could result in the
§403(b) plan losing its tax-favored status, meaning the
employees' ability to accumulate retirement savings is reduced
and their current income tax liability increased.
Which Employers Are Likely to Experience a §403(b)
Plan Document Failure?
Section 403(b) plans can be maintained only for the benefit of
employees of private §501(c)(3) organizations, such as
religious, charitable and educational organizations, and for the
benefit of employees of public schools. While any employer is
vulnerable to a Plan Document Failure, §403(b) plans
maintained by a governmental entity or by an employer whose plan
allowed for only voluntary employee contributions were not
generally subject to the written plan document requirement prior to
2009. These employers should examine their records to be sure their
documents are now compliant.
What Are the Financial Savings for Correcting §403(b)
Plan Document Failures Now?
If the voluntary submission is limited to the failure to timely
adopt the §403(b) plan document, the applicable IRS compliance
fee is reduced by 50 percent, provided
the submission is made on or before December 31,
2013. For example, if a §403(b) plan has between
101 and 500 participants, the compliance fee for 2013 is
$2,500 rather than $5,000.
Clearly this $2,500 is a bargain when contrasted with the potential
financial exposure for not correcting the Plan Document Failure in
2013. First, if the voluntary submission is made after 2013, the
compliance fee will double in amount. Second, if not corrected
under EPCRS, the Plan Document Failure could cause the employer to
pay a negotiated sanction amount far in excess of $2,500. As noted
above, a Plan Document Failure causes the §403(b) plan to lose
its tax-favored status. Instead of imposing this draconian penalty,
in reality, the IRS negotiates a sanction amount based on the
additional income tax the IRS could collect for all open tax years
from the individuals participating in the §403(b) plan. To
illustrate the potential sanction, look at just one participant who
contributes an average of $16,000 per year and who pays an
effective federal tax rate of 25 percent. The starting point for
the sanction amount with respect to just this one participant is
$12,000. Obviously this amount increases dramatically when all
participants are considered. Although the IRS negotiates a
percentage of the maximum sanction amount, it does not typically
reduce the sanction below the amount the employer would have paid
under EPCRS if it submitted voluntarily.
How Can Day Pitney Help?
Day Pitney's Employee Benefits and Executive Compensation
practice group has deep experience with EPCRS. In connection with
the above, our attorneys can:
- Review §403(b) plan documents to determine if they contain the specific terms required by the Internal Revenue Code.
- Review the procedures for adopting the §403(b) plan to determine if the plan was timely adopted.
- If necessary, prepare the voluntary submission under EPCRS and represent the employer in any negotiations with the IRS.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.