IRS (Finally) Releases Updated Voluntary Correction Procedures, Including 403(b) Corrections

On December 31, 2012 the Internal Revenue Service (IRS) released Revenue Procedure 2013-12 http://www.irs.gov/pub/irs-drop/rp-13-12.pdf which replaces existing Revenue Procedure 2008-50, the procedure for voluntary correction of qualified retirement plan errors. The correction procedure, known as the “Employee Plans Compliance Resolution System (EPCRS)” has been available for many years as a means for employers to maintain the tax qualified status of their retirement plans upon discovery of document and/or operational errors.

403(b) Corrections

Final regulations for Code Section 403(b) Tax Sheltered Annuities became effective for plan years beginning in 2009. Included in those final regulations was a requirement that such plans be maintained pursuant to a written plan document. Tax exempt organizations and schools sponsoring tax sheltered annuity plans had until the end of 2009 to adopt a written plan document in order to be in compliance. Failure to adopt a written plan is a disqualification error. The new Revenue Procedure expands the 2008 version and includes additional correction alternatives for 403(b) plans including failures to adopt a compliant plan document in conformity with the 403(b) Final Regulations and operational errors such as the failure to offer plan deferral options to all eligible employees. Although the new procedure is technically effective April 1, 2013; plan sponsors are allowed to begin to rely and utilize the new procedure immediately.

Other Features of the Revenue Procedure

The Procedure provides for new application procedure with new IRS forms 8950 and 8951 which are currently not yet available. The Appendices in the Short Form Filing Procedures have been slightly modified as well. The Revenue Procedure incorporates the recent IRS announcement that the IRS Letter Forwarding Program has been discontinued as a means of satisfying fiduciary obligations to locate missing participants.

Other Significant Changes:

Any correction method which requires a qualified non-elective contribution (QNEC) cannot be cured by utilizing unallocated forfeitures available under the Plan.

Matching contributions on corrections for excluded participant deferrals can now be subject to the Plan’s regular vesting schedule (previously matching contributions had to be fully vested).

Late Adopters of 403(b) plan documents are eligible for a 50% reduction in the voluntary correction fee if the application is filed on or before December 31, 2013.

Overpayments to former employees. Plan sponsors are required to use reasonable efforts to recover overpayment amounts. Under the revised Procedure employers are not required to contribute to the Plan amounts not recovered as is the case with the current Revenue Procedure.

This release has been anticipated by advisors and plan sponsors for some time and will be useful in bringing plans back into compliance in 2013 and beyond.

Topics:  403(b) Plans, Annuities, IRS, Qualified Benefit Plans, Retirement Plan

Published In: Administrative Agency Updates, Finance & Banking Updates, Labor & Employment Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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