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IRS’s Employee Plans Correction Procedures Expanded for 403(b) Plans

On December 31, 2012, IRS released Revenue Procedure 2013-12 modifying and expanding their Employee Plans Compliance Resolution System (EPCRS).   While the new revenue procedure made many changes to EPCRS, one of the most significant changes was the long promised inclusion of expanded corrections for 403(b) plan failures.  These plans are sponsored by tax exempt organizations under Internal Revenue Code (IRC) section 501(c)(3), educational institutions, and states and their agencies or political subdivisions.

Failure to Timely Adopt a Written Plan Document

Under the final regulations, sponsors of calendar year plans were required to adopt a written plan document no later than December 31, 2009.  A 403(b) plan sponsor may use the Voluntary Correction Program (VCP) under EPCRS to correct a failure to timely adopt a written 403(b) plan document.  Further, if the VCP submission involves a failure to adopt a written 403(b) plan document timely in accordance with the final regulations and IRS Notice 2009-3, the failure to timely adopt the plan is the only failure included in the submission, and the VCP submission is made by December 31, 2013, the applicable IRS compliance fee is reduced by 50%.  The standard compliance fees under EPCRS range from $750 for plans with less than 20 participants to $25,000 for plans with more than 10,000 participants.  Accordingly, IRS is offering a significant incentive for 403(b) plan sponsors to bring their plan documents into compliance.

Failures Eligible for Correction Expanded
403(b) plan sponsors can now correct failures arising from noncompliance with the form and operational requirements of the final section 403(b) regulations and other guidance issued by IRS. The changes generally permit 403(b) plan sponsors to correct failures affecting their plans in the same manner as a tax qualified plan (e.g., a 401(k) profit sharing plan) with the same failure.  Sponsors of 403(b) plans that have discovered errors in their plans’ operation may use EPCRS to correct the following types of errors:

  • Excluding eligible employees from the plan
  • Failure to make salary deferrals universally available to employees under IRC section 403(b)(12)(ii)
  • Failure to limit participant salary deferrals to the IRC section 402(g) limit (currently $17,500)
  • Failure to limit employer matching contributions under IRC section 401(m)
  • Failure to limit participant compensation for plan purposes under IRC section 401(a)(17) limit (currently $255,000)
  • Failure to pay required minimum distributions to plan participants 
  • Problems with direct rollovers of participant distribution
  • Failure to meet the general nondiscrimination rules under IRC section 401(a)(4) as applied to 403(b) plans
  • Failure to meet the minimum coverage requirements of IRC section 410(b).

These types of operational failures may be corrected as outlined in EPCRS and may or may not require the plan sponsor to submit the errors to the IRS for review and approval.  Plan sponsors should contact their plan advisers to determine how best to correct an operational failure under the IRS’s correction program and to determine whether the situation requires a formal submission to the IRS to correct the problem.

Effective Date

These revisions to EPCRS are generally effective April 1, 2013; however, plan sponsors may elect to apply the new provisions on or after December 31, 2012.

For 403(b) plan failures that occurred prior to January 1, 2009, plan sponsors must use the definitions in Rev. Proc. 2008-50 to determine which failures may be resolved under EPCRS.

Impact on Plan Sponsors
These revisions to EPCRS finally bring the corrections available to sponsors of 403(b) plans into line with those available to the sponsors of tax qualified retirement plans.  The IRS has developed the correction programs under EPCRS over many years and has shown a fair amount of flexibility in approving corrections of plan sponsors that voluntarily correct problems they find with their plans.  Also, the related fees are extremely reasonable in comparison to the penalties that can and are typically assessed under their audit closing agreement program.  Accordingly, we encourage all plan sponsors to take advantage of these programs to keep their plans in compliance and exempt from taxes.

 

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