New EPCRS procedures

[Kimberly S]

I've been reviewing Rev Proc 2008-50 to see if the correction for employees permitted to defer before meeting the plan's eligibility requirements and entry has been changed. I don't see that situation mentioned at all. If I've missed it, I'd love a reference to where it's hiding.

If it truly isn't there, does that mean that we continue to use the direction from 2006-27? Section 2.01 says that 2008-50 supersedes 2006-27, which leads me to believe that if it is gone, it no longer applies. That begs the question: How do you fix this now?

[Guest Sieve]

Look at Section 4.05 & Appendix B, 2.07(3).

[Kimberly S]

Thanks Larry. I found 4.05, but had missed App. B 2.07(3).

[blue]

EPCRS correction of early inclusion of otherwise eligible employee failure allows for retroactive plan amendment to correct provided the employees affected by the amendment are predominantly non-highly compensated employees.

The correction procedure further states the plan should submit the amendment to the service for a determination letter.

We use a prototype document which states use EPCRS to correct failures. However, have been told that informally the IRS has stated they do not want plan sponsors to submit amendments for these types self correction.

Do you submit your amendments?

[Kimberly S]

Up until the new Rev Proc, most of our clients were correcting by forfeiting the inelgible deferrals and making the participant whole outside the plan to avoid having to file for a D letter. It doesn't look like that is any option any more, so we're trying to figure out what to do.

[Guest Sieve]

For what it's worth, the 2008 EPCRS is effective 1/1/2009, but can be applied as early as 9/2/2008. So, you have the choice to use either EPCRS for the rest of this year.

[blue]

Unless I am missing something the option of correcting for early inclusion of otherwise eligible employee by forfeiting the ineligible deferrals and making the employee whole outside the plan was never in EPCRS.

I do see where it is addressed in Sal's book.

[Kimberly S]

I'm questioning it because I've read articles indicating that it is no longer be available under Rev. Proc 2008-50. And since it wasn't in earlier EPCRS procedures either, I'm confused about how continuing to omit any mention of it would eliminate it.

[Tom Poje]

when the self correction first came about, the idea was to "put the plan in a position it would have been if the error had not occurred"

therefore, logically, it made sense the person wasn't eligible to defer, so forfeit and make the person whole outside the plan.

things evolved over a few years, and the IRS said the preferred method would be to retroactively amend the plan to let these people be eligible, because in addition the getting the plan in the proper position, the idea is also to 'leave the $ in the plan if possible'.

I find the idea that "I don't want to apply for a determination letter" somewhat of a slim reason for not correcting under the suggested method. But maybe that is just me. could you get by forfeiting? I haven't heard. if you do so, you simply have guarantee that the IRS will approve of what you did if the plan gets audited. EPCRS is not meant to offer every single possible 'how to correct' method - that would seem to be impossible to do - so there is some leeway in how you handle things as far as self correction goes, as long as you follow similar suggestions under the ePCRS program.

[Kimberly S]

Thanks for that perspective Tom.

I understand your concern about the D letter. To a small employer who barely understands why they have to pay an annual fee for plan administration at all, the cost of paying someone to prepare the D letter submission can be overwhelming. It shouldn't be, but often is.

We guarantee nothing, because there are no guarantees under audit. I'm working with an IRS auditor now who is questioning the form of a document covered by a D letter, but that's another story. We tell the client what EPCRS says, recommend that they consult their own attorney (which most of them don't because it costs money) and leave the final decision to the trustees.

[Guest Sieve]

Kimberly --

You said something that is a pet peeve of mine when I talk to my TPA friends, and that is to "leave the final decision to the trustees". In fact, the final decision would be in the hands of the administrator (probably the employer), right? The Trustees (even if they are the employer's owners)would have no authority to authorize amendment of the plan, or return assets to an employee, or otherwise deal with administration of the plan.

[Kimberly S]

Ironically, my employer believes that the trustee is the only one who can authorize most of those things. The good news is that in the vast majority of cases for our clients the trustee and business owner are the same individual.

[Guest Sieve]

As long as they make the proper decisions with their administrator hat on, and as long as they sign appropriate documents as administrator/employer rather that as trustee. then that's ok. You just don't want a plan amendment to be signed by the CEO as "trustee" rather than as the employer--that would, no doubt, cause the amendment to be invalid, with, perhaps, severe consequences (such as invalidating an amendment ceasing matching contributions).

[K2retire]

Would your concern be influenced by whether the plan a discretionary trustee or a directed trustee?

[Guest Sieve]

No. Even a discretionary trustee will have, without fail, no discretion with respect to the administration or management of the plan (as per the plan document)--the trust, yes, but not the plan. Trustees (specifically institutional trustees) won't touch that with a 10-foot pole--even in their own prototype documents.

[K2retire]

Interesting. I've worked places where the trustee had to sign everything, and others where the employer did, and one that couldn't decide and kept switching back and forth, but no one has ever explained the reasoning for each position.

[Guest Sieve]

You may want to look at some documents to get a feel for the powers and responsibilities given to the administrator vs. those given to the Trustee. In effect, that's how the line is drawn and the authority divided.