Guest Article

New Correction Program for Prohibited Transactions Expected

The excise taxes and civil penalties imposed on correcting prohibited transactions have become a disincentive to employer correction, according to Internal Revenue Service (IRS) and Department of Labor (DOL) officials speaking at a recent American Bar Association (ABA) conference.

Now both agencies are working together to create a new system to encourage early detection and correction of prohibited transactions by employers, with little or no penalties involved.

Prohibited transactions can occur when a plan makes a loan or extends credit to a "disqualified person." Disqualified persons include plan fiduciaries, service providers to the plan, employers of employees covered by the plan and 50-percent owners.

The IRS did not include correcting prohibited transactions in the Employee Plans Compliance Resolution Systems (EPCRS) because current regulations provide a method of self-correction, according to Carol Gold, director of the IRS Employee Plans Division. However, both the DOL and IRS recognize that large penalties may act as a disincentive to self-correction. Employers that identify a prohibited transaction pay a fine of 15 percent of the amount of the transaction for each year from the date of the transaction to the correction. Other penalties apply, and they can easily add up to 100 percent or more of the transaction's initial value.

Speaking at the ABA conference, Gold said that the self-administered program that the IRS and DOL are developing will encourage employers to voluntarily correct defects in their plans without the full range of penalties an audit may trigger.

Gold said that the DOL would have authority over the program, though she recognized the benefits of "one stop shopping" in voluntary compliance programs.

Gold hopes to see a formalized proposal in the "near future," she said.

Reprinted with permission from the March 2001 supplement to The Pension Plan Fix-It Handbook, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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