IRS Newsletter: Employee Plans News, Issue 2016-6 (May 18, 2016)
This issue of Employee Plans News highlights several retirement plan corrections of interest to 401(k) plan sponsors and their advisors:
Pre-Approved Plan VCP Submission Kit. Adopting employers of pre-approved defined contribution retirement plans were required to formally adopt and sign restated plan documents on or before April 30, 2016, that incorporated changes required by the Pension Protection Act (PPA) (see our Checkpoint article). (Employers converting existing individually designed plans to pre-approved plans on or after January 1, 2016, have until April 30, 2017 to adopt (see our Checkpoint article).) Failure to timely execute the required restatement is a qualification failure that can be corrected under the IRS’s Voluntary Correction Program (VCP). The IRS has created a VCP Submission Kit for this correction that includes a step-by-step guide. The instructions note that the Kit only applies to failures to adopt the PPA requirements by April 30, 2016. Other failures require additional steps under the general VCP procedures. The IRS also has announced an alternative to correcting under VCP that allows the pre-approved plan provider to request “umbrella” closing agreements on behalf of all adopting employers that missed the deadline (see our Checkpoint article).
Anonymous VCP Submissions. Anonymous VCP submissions are available for those seeking to explore an alternative correction method without identifying themselves. Considerations for using this procedure include the following: (1) if there is no agreement, 50% of the VCP compliance fee is refunded; (2) without knowing the sponsor’s identity, the IRS might initiate a plan audit during the process; (3) there is no priority for processing anonymous submissions; and (4) preparing the anonymous submission, including redacting identification from the submission documents, can be time-consuming.
Nondiscrimination Gateway Test Failures. Plan sponsors using cross-testing are reminded that the plan document must specify which “gateway” test alternative is to be used. (In the 401(k) plan context, cross-testing might be used for profit-sharing contributions that do not satisfy a safe harbor.) If the specified gateway test is not actually used, the plan has a qualification failure that can be corrected by retroactive amendment under VCP if the correction does not violate other qualification requirements (such as the anti-cutback rule under Code § 411(d)(6)).
EBIA Comment: Adopting employers of pre-approved plans that missed the April 30, 2016 deadline will want to review the VCP Submission Kit and the “umbrella” option with their advisors. And plan sponsors relying on cross-testing should confirm that actual testing complies with the plan’s terms. Other items of interest in the newsletter include information about two IRS educational programs—2016 IRS Nationwide Tax Forums (focusing on retirement plans for small businesses) and EP Snapshot Issues (summarizing retirement plan research)—and an explanation of Disaster Relief for Retirement Plans and IRAs. For more information, see EBIA’s 401(k) Plans manual at Sections XX.F.2 (“Cross-Testing: Amounts Testing on a Benefits Basis”), XXVII.L (“Advisory or Opinion Letter: Pre-Approved Plan”), XXXIV.M (“Errors Involving Plan Documents”), XXXV.E.4 (“Anonymous Submissions”), and XXXV.E.6 (“VCP Submission Procedures”). You may also be interested in our upcoming webinar “Common Mistakes and How to Fix Them: 401(k) Plans” (live on 07/21/16).
Contributing Editors: EBIA Staff.