Guest Pennysaver Posted July 11, 2011 Share Posted July 11, 2011 An ERISA 403(b) plan that excludes part-time employees from making deferrals would fail the universal availability requirements of IRC Section 403(b)(12) and Treasury Regulation Section 1.403(b)-3(a)(3) and would be an operational failure under Section 5.02(a) of EPCRS. Assuming the self-correction period has not expired, the correction for the improper exclusion of eligible employees from a 403(b) plan would be the same as for a 401(k) plan under Appendix A.05 and Appendix B 2.02 of EPCRS, correct? Or, would this failure be considered "egregious" for purposes of Section 4.11 of EPCRS, and thus require a VCP application under Appendix D to EPCRS? Link to comment Share on other sites More sharing options...
ETA Consulting LLC Posted July 12, 2011 Share Posted July 12, 2011 This is a good one. The one thing that immediately strikes me about SCP is that in order for a plan to utilize it, the plan must have a favorable determination letter or reliance on an opinion letter (prototype). These aren't necessarily available to 403(b) plans, yet. <-- They may be, but I am unaware. Interesting that it is already an ERISA plan. Just think if it weren't; wouldn't the Employer contribution make it ERISA (and wouldn't the ERISA provisions apply only to the contracts that held the Employer Contributions). But to answer your requestion without rambling on, I would 'think' that VCP would be the only alternative for this plan; even though the correction is very similiar to that prescribed for 401(k) plans. Good Luck! CPC, QPA, QKA, TGPC, ERPA Link to comment Share on other sites More sharing options...
Kevin C Posted July 12, 2011 Share Posted July 12, 2011 Rev. Proc 2008-50, Section 1.03 says that SCP is available for 403(b)'s. Unless your failure is listed in (a), (b) or © below, I think there would have to be an IRS determination that the failure is egregious, or it is not egregious. Rev. Proc. 2008-50, Section 4.11 Egregious failures. SCP is not available to correct Operational Failures that are egregious. Egregious failures include: (a) a plan that has consistently and improperly covered only highly compensated employees; (b) a plan that provides more favorable benefits for an owner of the employer based on a purported collective bargaining agreement where there has in fact been no good faith bargaining between bona fide employee representatives and the employer (see Notice 2003-24, 2003-1 C.B. 853, with respect to welfare benefit funds); or © a defined contribution plan where a contribution is made on behalf of a highly compensated employee that is several times greater than the dollar limit set forth in § 415©. VCP is available to correct egregious failures. However, egregious failures are subject to the VCP fees described in section 12.06 and, for purposes of section 12.06, an egregious failure would include any case in which the IRS concludes that the parties controlling the plan recognized that the action taken would constitute a Qualification Failure and the failure either involves a substantial number of participants or beneficiaries or involves participants who are predominantly highly compensated employees. Audit CAP also is available to correct egregious failures. We had your issue come up in a recent audit of a client's 403(b). The client, without telling us, decided that the <20 hour per week exclusion in the document at the time (2007 & 2008) really meant that "part time" employees were excluded and started excluding everyone who worked <32 hours per week. We found out about it when their main HR person explained what they were doing in a meeting with the IRS agent. The IRS has been very clear that the situation must be corrected, but they have never used the word egregious. From discussions with the IRS agent, this kind of failure is fairly common. He commented several times that every plan he has ever audited that used the <20 hour per week exclusion had mistakes in applying the provision. Link to comment Share on other sites More sharing options...
Guest Pennysaver Posted July 12, 2011 Share Posted July 12, 2011 Thanks, ERISAtoolkit and Kevin C. Now, for a slight variation on the original question: Suppose the ERISA 403(b) plan doesn't exclude part-time employees from making deferrals, but excludes them from the employer matching contribution. Now it's not a universal availability issue, but is it an issue under Treasury Regulation Section 1.410(a)-3(e)? If so, how would it be corrected under EPCRS? "Document failure" isn't defined under EPCRS for 403(b) plans, so is it an operational failure? Link to comment Share on other sites More sharing options...
Kevin C Posted July 12, 2011 Share Posted July 12, 2011 If the plan excludes part-time employees from match eligibility without having an exception for those who complete a year of service, I think you have a plan document failure. But, unfortunately 403(b) plan document failures can't be corrected under Rev. Proc. 2008-50. The new EPCRS Rev. Proc. is supposed to cover 403(b) document issues, but there is no telling when it will be out. One suggestion from the IRS EPCRS phone forum on 8/24/2010. The speaker addressed the failure of a 403(b) to timely adopt a plan document, but I think a plan document failure would be similar. He said to go ahead and fix it, don't wait for the new Rev. Proc. From the transcript: The primary purpose of the expected update is to reflect the written plan requirement under thefinal 403(b) regulations. The structure of the programs remains the same. What you’re familiar with in 2008-50 largely will carry forward to the subsequent revenue procedure.There will be some tweaks but the primary focus is to reflect the written plan requirement of the final 403(b) regulation. So what does that mean? Basically once we get the new revenue procedure we will be able to address issues such as the failure to adopt the written plan by the end of 2009. And now that we have a written plan requirement the plan in operation has to operate in accordance with plan terms, so if you have a failure to operate the plan in accordance with plan terms you would be able to address that under the new revenue procedure. Other 403(b) failures can be addressed under the current revenue procedure. So the follow up question you might ask is well, until that gets issued what should our approach be with respect to employers that have the failure to adopt a written plan in a timely fashion? What I would suggest is that if you know what the problem is and you know what the correction is, take that action. Don’t wait on corrections until the program opens up. So, for example, if you have a situation where you have an employer that hasn’t adopted a written plan program yet then adopt it, have the employer adopt it. Don’t wait until the program opens up before that particular action is taken. The entire transcript is here: http://www.irs.gov/pub/irs-tege/epcrs_phon..._transcript.pdf The handout from the forum can be accessed from here: http://www.irs.gov/retirement/article/0,,id=218995,00.html Link to comment Share on other sites More sharing options...
Guest Pennysaver Posted July 14, 2011 Share Posted July 14, 2011 The entire transcript is here: http://www.irs.gov/pub/irs-tege/epcrs_phon..._transcript.pdf Thank you very much for that information, Kevin C. Note: I was able to get a copy of the handout, but it appears the link to the full transcript no longer functions. If anyone can direct me to where I might find the full transcript, please let me know. Link to comment Share on other sites More sharing options...
Kevin C Posted July 14, 2011 Share Posted July 14, 2011 It looks like they moved the transcript. They have the audio for it, too. http://www.irsvideos.gov/SmallBusinessTaxp...mentPlans/EPCRS I also noticed they have another phone forum on EPCRS scheduled for 8/25/2011. http://www.irs.gov/retirement/article/0,,id=218995,00.html Link to comment Share on other sites More sharing options...
Guest Pennysaver Posted July 16, 2011 Share Posted July 16, 2011 It looks like they moved the transcript. They have the audio for it, too.http://www.irsvideos.gov/SmallBusinessTaxp...mentPlans/EPCRS I also noticed they have another phone forum on EPCRS scheduled for 8/25/2011. http://www.irs.gov/retirement/article/0,,id=218995,00.html Wonderful, Kevin C. Thanks a million! Link to comment Share on other sites More sharing options...
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