HALLELUJAH! Rev Proc 2006-27 arrives!

[Brenda Wren]

Appears that Rev Proc 2006-27 issues new guidance and replaces the old UNFAIR guidance of Rev Proc 2003-44. When an employee is not given the timely opportunity to participate in a 401(k) it looks like new guidance says the correction is 50% of the missed deferral, not 100%. There also appears to be some new guidance for "brief exclusion" that requires NO correction. Wonder if the "brief exclusion" can be applied to situations where the employer failed to deduct 401(k) deferrals from special bonus payrolls??? That issue seemed to be a pet peeve of all the auditors I dealt with last year.

[GBurns]

http://www.irs.gov/pub/irs-drop/rp-06-27.pdf

[Guest mjb]

Are the auditors inquiring because the bonus was never contributed? In most cases the employee will notify the employer of failure to deposit the bonus which is correctible if the employee returns the net bonus paid after taxes to the employer prior to the end of the tax year and the employer deposits the bonus payment (with no tax withholding) in the 401k plan and adjusts income tax withholding going forward. The employer should provide a notice when bonus are paid that employees must notify the employer if a bonus payment is not contributed to the plan in order to correct the transaction.

[Brenda Wren]

The auditors took the position that according to the language in the plan document and the salary reduction agreement the employer failed to operate the plan in accordance with its terms when they failed to apply deferral elections to bonus paychecks. I don't recall if the issue boiled down to "per paycheck" as indicated on the salary reduction agreement or the fact that the document didn't specifically address if bonuses were subject to 401(k) withholding. The ERISA attorney was consulted and the document language was corrected going forward. But the auditors relied upon Rev Proc 2003-44 for guidance in correcting what they perceived as an operational defect.

The whole thing frosted me because I thought they were taking an extraordinarily, unnecessary conservative approach to a non-issue. No one was harmed and according to the client, the participants did not want deferrals applied to their bonuses and it was never an issue until the auditors made it one.

The examples in both Rev Procs address a different issue.......when an employer fails to even offer the 401(k) to a participant.....an entirely different scenario in my opinion.

[Guest mjb]

Are you referring to IRS auditors? I am not sure whether the auditors are correct. If the definiton of compensation is ambigious (because it does not refer to bonus) the plan admin has discretion to interpret the language of the plan document and make a reasonable decision as to what is included. I think the auditors were attempting to justify their decision by applying a section of the VCP procedure that did not apply to your situation. Did your lawyer ever ask the auditors why they thought this provision applied?

[Brenda Wren]

MJB, I can see from your previous posts on this subject that we agree on this issue. I am referring to CPA auditors. Thankfully, now we have official guidance from IRS that a "brief exclusion" does not require correction.

[E as in ERISA]

The "brief exclusion" rule has been around for a while. Did you see page 59 of the 2003 Revenue Procedure http://www.irs.gov/pub/irs-drop/rp-03-44.pdf ?

[Tom Poje]

as a side issue (unrelated to this discussion, but worthy of note), section 6.07 (assuming your print job is the same as mine it would be page 30)

Defaulted Loans can be fixed under VCP. finally, something in writing!