RatherBeGolfing

Napa Net article today on IRS testimony on the IRS rationale behind user fee increases. IRS Pressed on VCP Fee Changes at Hill Hearing Andrew Remo •4/18/18 Members of a House subcommittee pressed IRS representatives this week to explain their recent decision to dramatically increase the cost to small businesses of remedying retirement plan mistakes. An April 17 hearing held by the House Small Business Subcommittee on Economic Growth, Tax, and Capital Access focused on examining the rationale behind the recent change to the user fees that the IRS charges to correct retirement plan mistakes and the impact that change will have on small businesses and their willingness to sponsor a retirement plan. The American Retirement Association has previously expressed its deep concern that the vast majority of small plans will now see a significant fee increase when a small business has to correct a retirement plan mistake, a concern that was shared and communicated directly to the IRS during the hearing from subcommittee members of both political parties. The American Retirement Association submitted a statement for the record on the issue at the hearing. Sunita Lough, Commissioner of the IRS’s Tax Exempt/Government Entities (TEGE) division (who is currently assigned to lead the IRS’s Tax Reform Implementation Office) provided testimony to a skeptical subcommittee to explain her rationale behind the changes. Lough argued that the IRS was bound by an obscure intragovernmental policy document, Office of Management and Budget (OMB) Circular No. A-25, that directs all federal agencies to assess user fees that reflect the resources required to administer federal benefit programs. The IRS seems to have unilaterally determined that the retirement plan correction program – the Voluntary Correction Program (VCP) under the Employee Plans Compliance Resolution System (EPCRS) – falls into this category. She failed to mention in her oral testimony, however, that section 1101 of the Pension Protection Act, which authorized the EPCRS program, specifically directed the IRS to take into account the special retirement plan compliance concerns of small businesses. Under questioning by members of the subcommittee, Lough admitted that the IRS did not study how an increase in VCP user fees would affect small businesses’ willingness to adopt and/or maintain retirement plans. Instead, the IRS’s sole focus was on calculating the average time its employees spent on processing applications approving retirement plan corrections. Lough argued further that according to the IRS’s data analysis, the minimum user fee to correct mistakes through VCP should actually be $3,000 (up from a minimum fee of $500 in 2017) but that the IRS decided to only charge a $1,500 fee for plans with less than $500,000 in assets. Lough did offer that the IRS recently streamlined the work flow it used in the past to process retirement plan corrections such that user fees could be lowered during the next biennial review. She also stated that “we are open to looking at” where the IRS can expand the instances where retirement plan sponsors can correct mistakes by themselves – through EPCRS’s Self-Correction Program (SCP) – which will not involve any user fee. However, she qualified that response by suggesting that there are certain instances where self-correction doesn’t work and that the IRS needs to be careful about where there is a “third-party” or participant tax consequence that won’t fit into a self-correction regime. The American Retirement Association plans to be an active participant in a retirement plan community stakeholder meeting with the IRS in early to May to discuss the ways that the IRS can ameliorate the detrimental impact that these recent fee increases will have on small business retirement plans. The meeting will focus on ways to improve and expand the SCP program. ARA recently filed a comment letter April 4 with a number of recommendations to do just that. Andrew Remo is the American Retirement Association’s Director of Legislative Affairs.

We need more information, or possibly a better description of what happened in order to give you accurate advice. How much did she get? How much was she supposed to get? How much are demanding she repay?

No limitations or dates. A domestic partner is treated as spouse for all plan purposes if the provision is elected. None of my clients have elected to apply the provision after discussing it. I think that would be very different pre-Windsor. Spousal consent would be triggered by the election, but I'm not entirely sure what would happen if the participant were to elect an annuity. Would the issuer of annuity contract recognize the domestic partner as a spouse for the survivor portion? Even my openly gay clients have decided against this provision with the reasoning that marriage is now option in every state.

I haven't seen this pitch on its own, but I have seen it as part of the "we take on all fiduciary liability" marketing.

Let me guess, they are willing to take on that "liability" for a fee?

Nope. Like Larry, my clients are mostly small businesses with no HR department. We are lucky if we get a practice manager for day to day stuff, but even then auto-enroll and auto escalation type plans will be more problematic than useful. We have had a couple of advisers bring up the question but our clients have shot them down pretty quickly. I never encourage loans. Most of our clients start out without them, but some have added loan provisions down the road. Yes. Most of our plans include hardship provisions. All but one or two use the safe harbor rules. No. Actual hours of service unless there is a compelling reason not to (and that is very rare). We have a handful of plans that use some sort of equivalency, but only because that is how they do it for other reasons and they want their plan to have the same rules. Not an issue for our plans. The question has come up a few times, but in each case it was because someone misunderstood what it means. Our document has the option to recognize domestic partners as a spouse. There have been times where I have had to explain the difference between domestic partner and spouse. Investment direction. If a client comes on without an adviser, we always talk about what the client wants to do for investment direction. A lot of clients start with the position of "I want the participant to be responsible for their own investments" because they have heard that its a good way to get rid of liability. Once we explain what is required of them, many of our clients decide that pooled investment aren't so bad after all. We have plenty of trustee directed 401(k) plans and they outperform participant directed plans every single time. Many don't even realize that you don't have to let participants play Gordon Gekko just because they can defer.

We never discuss all plan-design choices, regardless of how much time we have at our disposal. Most clients don't want to know all the ins and outs, they want a plan that fits their needs and wants. I do have a few attorney clients who have read every single page of the document and asked a couple of hundred questions, but those clients are very rare. The way I look at it, plan design is a service. I don't expect my clients look at an adoption agreement and tell me which boxes to check. Instead, I find out what the client wants (often with input from the CPA, adviser, and sometimes attorney) and I design a plan to fit those needs. I will then present that plan and explain why I designed certain sections the way I did. If the client wants something changed, we talk about why they want the change and whether it is the best way to achieve it.

Thanks guys. The actuary got back to me as well and came to the same conclusion.

Thanks Mike

Plan sponsor wants to split its current SH401(k) (130-ish participants and going up each year) into two identical plans in order to avoid the audit requirement. Split could probably be done by placing certain categories of EEs in just one plan. I'm much more comfortable with this than alphabetical approach, but my understanding is that is that even that is generally considered acceptable. Here is the wrinkle. There is also a cash balance plan that is tested with the DC plan. Does this make splitting the DC plan more complicated? I had a brief conversation with an actuary and even he was stumped and needed to do some digging. Any insight would be greatly appreciated.

Also, some plans restrict the sources available for loans, which could make the maximum loan calculation different. For example, if your total account balance is $110,0000 but the plan does not allow you to borrow from profit sharing, your net balance is $90,000 available for loans. I'm not saying this is the case here, but it is something to keep in mind and ask about.

Eyelid surgery is another perfect example. Its usually cosmetic but it is called medically necessary due to impaired vision and so on. I have even seen doctors here in Florida advertise something like "want eye lid surgery but can't afford it? We can get your insurance to cover it!"

You could argue it, but it would be incorrect.. Prior spouse was free to waive the his/her benefit in favor of the children. If the participant does not change his beneficiary after divorce, the beneficiary designation may still be valid unless the plan document provides that a divorce nullifies the beneficiary designation. In that case, the participant would submit a new beneficiary designation naming the kids (former spouse does not get to consent here because he/she is no longer the spouse) or plan defaults would apply. If the participant remarries, current spouse must consent to making a non-spouse the beneficiary. That the former spouse consented doesn't matter.

So if I had a late 5500 and paid the $750 DFVCP penalty rather than the $15,000 IRS proposed penalty, are you saying the IRS will not honor the DFVCP filing for the 5500 because I also neglected to file a Form 8955? Thereby making the late 5500 subject to the proposed penalty rather than the reduced penalty?

Just curious as to your thinking here. If the spouse is the automatic beneficiary, why would the prior spouse have a say on benefits the new spouse is now the beneficiary of?

No worries

If an RMD is required from the plan, that RMD must be completed first, and the rest rolled to the IRA. The PLAN is required to make the RMD. Its a qualification issue if it does not. Thats why you cant satisfy the total RMD from both IRA and QP by taking a RMD for the full amount from the IRA and leaving the QP assets alone. The IRS may have said he does not have to take an RMD from the plan because he is not an owner and is still employed. But that goes out the window if you want to take a distribution, then the RMD has to be satisfied first.

@ERISAAPPLE This case did not seek a remedy against the spouse, it sought a remedy against the plan.

@ESOP Guy My comment wasn't the literal reading of the badly worded sentence, it was to your question. I do, because I don't think that sentence accurately describes the plan's eligibility requirements. and the law does require the plan to operate by the terms of the document. And there is no way this sentence alone is an accurate description of the eligibility requirements, as it only talks about the first 12 months of employment. That alone means that there is more to it since it clearly is not legal to only consider the first 12 months of employment. If the question is, is there a legal problem with a document actually designed to let people in as soon as they hit 1,000 hours within a 12 month eligibility computation period? No, I would agree that as long as it is more liberal than the statutory requirement, it is fine.

The plan must be administered per the terms of the plan document, not by how a participant interprets a badly worded sentence. Just reading the plan document's definition section will probably clear up any confusion. This sounds like something from an SPD, and I would bet the document itself does not word it this way. Either way, if the document (other than the badly worded sentence provided) clearly provides for a year of service as a 12 month period during which an employee works at least 1,000 hours, it would be a failure to follow the terms of the document by letting them in early. And if we really want to be picky, this would only allow an employee to become a participant if they worked a 1,000 hours in the first 12 months of employment, so no dice if you get 1,000 any year after that. And do they have to be consecutive months? Or can I quit after 2 months and still count them if Im rehired down the line?

It is a problem only if you have to use average benefits tests to pass. § 1.410(b)-4. The IRS considers criteria having the same effect as exclusion by name to NOT be a reasonable classification. Can you pass without ABT? Then no problem.

My VS document provides that the Plan Admin can determine the ordering rule as long as it is nondiscriminatory, and that such determination may be to allow the participant to select the order. Like @Kevin C, we can also override that in the AA and/or limit certain types of distributions to certain fund sources.

a bit of a misleading title as she was not a surviving spouse when the distribution was made... She was simply a spouse with no claim to the assets. What if it was a $10,000 account balance. Anyone want to argue that the participant shouldn't be able to take a distribution even though no QDRO had been issued and they were still married?

Most likely yes. We are not a 3(16) TPA, but we have some language in our service agreement regarding truthful representations from the sponsor. Most TPAs probably have similar language in their agreements. Is it enough to fend off a member of the plaintiffs bar if they have a juicy case on their hands? Probably not. We ask for information on prior plans of the sponsor. The level of detail we get varies. If someone wanted to hide it they probably could. Error-checking or post filing review? I highly doubt it would flag all John Doe's because one John Doe was enjoined from serving as a fiduciary. What might be able to catch it is EFAST. I would assume that they ban or suspend the credentials of the person enjoined from serving as a fiduciary in the future, and if they tried to register again it might catch that. I really don't remember the steps and information they require in the registration process, but I would be surprised if they didn't throw in a "have you ever been convicted of XXX or have your XYZ suspended yada yada yada".

If you want to be 100% sure that your correction is reasonable and appropriate, use the correction method spelled out in EPCRS as "deemed reasonable". But any method is allowed as long as it is reasonable and appropriate.