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Common Employee Benefit Plan Compliance Issues and How to Address Them. Tax Consequences of Plan Disqualification. When a tax-qualified retirement plan is “disqualified”, the plan’s trust loses its tax-exempt status and becomes a taxable trust. Disqualification affects three groups:

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tax consequences of plan disqualification
Tax Consequences of Plan Disqualification

When a tax-qualified retirement plan is “disqualified”, the plan’s trust loses its tax-exempt status and becomes a taxable trust. Disqualification affects three groups:

● Employees

● Employers

● The Plan’s Trust

tax consequences of plan disqualification cont d
Tax Consequences of Plan Disqualification (cont’d)

Consequence #1 – Employees must include contributions to the plan’s trust for his or her benefit to the extent vested.

(Note: some exceptions for non-highly compensated employees)

tax consequences of plan disqualification cont d1
Tax Consequences of Plan Disqualification (cont’d)

Consequence #2 – Employer deductions limited-deductions only allowed in the taxable year the benefit is paid to the participant.

tax consequences of plan disqualification cont d2
Tax Consequences of Plan Disqualification (cont’d)

Consequence #3 – The Plan trust owes income tax on earnings when “earned” by trust assets.

other consequences of plan errors
Other Consequences of Plan Errors
  • Participant Claims/Litigation
  • Beneficiary Claims/Litigation
  • Department of Labor Enforcement Action
correction programs available
Correction Programs Available
  • Internal Revenue Service (IRS)

● Employee Plans Compliance Resolution System (EPCRS)

  • Department of Labor (DOL)

● Delinquent Filer Voluntary Compliance Program (DFVCP)

● Voluntary Fiduciary Correction Program (VFCP)

irs employee plans compliance resolution system
IRS – Employee Plans Compliance Resolution System

Consists of Three separate correction methods:

  • Self-Correction Program (SCP)
  • Voluntary Correction Program (VCP)
  • Audit Closing Agreement Program (Audit CAP)
irs epcrs
IRS – EPCRS

Self-Correction Program (SCP)

  • Allows self-correction of “insignificant” operational failures, at anytime and pay nofee
  • “Significant” failures can be corrected if done within 2 years
  • No application or reporting requirements
  • Plan must have sufficient compliance practices and procedures
irs epcrs1
IRS – EPCRS

Voluntary Correction Program (VCP)

  • Available to correct one or more errors
  • Plan must initiate prior to notice of IRS audit/examination
  • Application to IRS required
  • Compliance fee, based on size of plan, must be paid
irs epcrs2
IRS – EPCRS

Audit Closing Agreement Program (Audit CAP)

  • Available to correct errors discovered under IRS Audit
  • A monetary “sanction” must be paid – amount determined based on amount of tax benefits preserved
dols delinquent filer voluntary compliance program
DOLs Delinquent Filer Voluntary Compliance Program

● Designed to encourage voluntary compliance with annual reporting requirements under ERISA (Form 5500)

● Reduced penalties determined based on reduced fee scale

- Per day rate

- Per “filing” cap

- Per “plan cap

dols voluntary fiduciary correction program
DOLs Voluntary Fiduciary Correction Program
  • Designed to encourage voluntary compliance by self-correcting
  • Available to correct 19 categories of transactions
  • Provides acceptable methods of correction
  • Must file an application and take corrective action
practical issues
Practical Issues
  • Once issue identified to counsel the matter will have to be addressed by corrective actions – audit letter responses
  • When in doubt correct – even if self-correct
  • Know your plan’s terms and follow them