Tax Panel IDs Retirement Plan Mistakes
June 19, 2006 — An expert panel of Internal Revenue Service officials and tax professionals reviewed the basic reasons to fix mistakes in retirement plans now rather than later. They also recommended regular compliance reviews and provided detailed descriptions of the three levels of retirement plan correction programs currently in place. / E! u p W" t
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8 d+ P* [8 ^$ h; V9 W8 YAccording to the Tax Talk Today panel on this month's tax Webcast, failure to properly qualify and maintain the retirement plan can have dire consequences for plan participants and the plan sponsor: disqualification of the plan, which means loss of the tax benefits bestowed on qualified plans; and, in some cases, fees and sanctions imposed by the IRS against the plan sponsor. * x5 Q/ O" ~5 B# q, V
) g" @1 K8 f2 n! P7 iJoyce Kahn, manager, Employee Plans Voluntary Compliance, Tax Exempt and Government Entities Operating Division, IRS, said there are generally three common mistakes, or "qualification failures," in qualified retirement plans: / @6 d2 a7 P) S/ D, n8 ?9 K
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Plan document failure (the plan document does not satisfy the tax code);
# {$ \( a2 A0 ~( Z) H# s3 N& l7 z5 v- iOperational failure (the plan document is not followed properly); and,
) _8 f, w7 _# d$ w5 p& v: xDemographic failure (the plan violates nondiscrimination rules in the tax code). 2 P0 h; r$ `2 L' j
"One of the things we hear often is that the reason a failure occurred is because the parties are assuming that someone else is handling something," said Kahn. "Get things clear and out on the table."
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9 o5 _( S5 a7 K! Z/ VMichael P. Coyne, president of Waldheger Coyne LPA, noted the use by a fellow colleague of a "Who-Does-What Letter" which is sent out when a new plan is established. The letter is designed to allocate responsibilities among the employer, the plan administrator, the trustee, etc. so that everybody knows what it is they're supposed to do.
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"It may be incumbent on the plan fiduciaries to make sure a review is performed," said Seth H. Tievsky, partner, Ernst & Young LLP. 5 d$ z) X( X7 e- M: O" J& g
$ |' C/ Q5 N+ o3 C* NOnce a plan sponsor has identified a qualification failure, one of three retirement plan correction programs in the Employee Plans Compliance Resolution System (EPCRS) can be used to rectify the problem. 4 z7 @9 J. v! I) W. R
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Self-correction Program: for insignificant qualification failures (factors for determining insignificance are listed in Revenue Procedure 2006-27) or for significant failures if corrected within two years of the failure; as the name suggests, the plan sponsor handles the correction internally â€â
