Caught in the Pension Plan Update Vise

[Guest aidan7]

Hi All -

My husband was out of the country on business last spring for an extended period when a huge packet of documents arrived from the brokerage firm. By the time the packet was opened, it was immediately apparent that an important deadline had been missed for updating the money purchase and profit sharing Keogh for his sole proprietorship.

Apparently, the plans have not been updated since the late 90's - for GUST and EGTTRA. (I'm quickly getting up to speed on this stuff!)

What's really discouraging about all this - 2010 is the last year the plans will be funded since my husband is now a W-2 employee.

Our broker hasn't been very helpful - they told us to check out the IRS voluntary compliance website. I'm pretty savvy but I can tell this is not something we should try at home. : )

The broker says "consult your tax professional." But our long-time accountant and several local CPA's have said compliance issues are outside their comfort zone. We've called around and so far have been unable to identify a professional to help. Apparently, this is an esoteric skill?

There are no plan errors other than the failure to restate, as far as I can tell.

At any rate, given the skeleton info I've provided - a money purchase and profit share plan for a sole proprietor that needs updating since late '90's - do y'all have any idea who could do this for us and how much it might cost? (We live in California.)

Many, MANY thanks for any advice. I've been trying for MONTHS to get this problem handled, and I'm feeling overwhelmed and a little desperate.

A.

[Guest Matthew Gouaux]

You should speak with an ERISA attorney or benefits consultant who has experience correcting qualified retirement plan issues under the IRS Voluntry Compliance Program (part of the Employee Plans Compliance Resolution System, or EPCRS, Rev. Proc. 2008-50). The application process is relatively straightforward. The cost depends on how many employees participate int he plan, and how many plans need to be corrected. For example, if you are correcting a failure to amend one plan with fewer than 20 participants, the IRS fee is $750. Attorneys' or consultants' fees will vary, but it shouldn't take someone with experience in this area more than a few hours to put together the applicaiton (sometimes negotiation with the IRS is necessary after the application is subitted, but that would be unusual with a "nonamender" problem such as yours).

Matt

[John Feldt ERPA CPC QPA]

Perhaps a good place to start would be to contact the firm that sent you the documents. If they created the documents, they should be able to help you (probably). Also, you should have received a document in 2001 or 2002 for your signature, do you know what happened to that package?

Maybe a little background will help here. The assets of these plans are considered "tax-qualified" - because a tax-deduction was allowed for the contributions and the earnings are not taxed within the plan (or still deferred if rolled over to an IRA or other tax-qualified arrangement). When benefits are eventually paid out, only then will the amounts paid be subject to income tax. In order to qualify for these tax deductions and tax-deferred benefits, the plan must be in writing - we call that the plan document.

In order for the plan to keep its tax-qualified status, it must (generally) also operate according to its plan document.

Ongoing, the goal is to keep the plan's assets from all becoming taxable, to avoid having the plan sponsor lose any of its tax deductions, and to avoid any sanctions or fines (disqualification). Because of this tax-deferred status, our tax code (the laws passed by our elected officials in Congress) and its regulations (the Treasury Department's interpretation of those laws) and all of the other official guidance from Washington, require employers sponsoring these plans to jump through hoops (adopt amendments) almost every year. Then, every 5 or 6 years, you are generally required to completely restate the plan's document again to obtain an official opinion letter saying that the written plan language is still qualified.

Technically, if you think you have adopted perfect amendments each year and if you are comfortable with the uncertainty that even one word in your plan document could subject your entire plan to potential disqualification if audited by the IRS, then you would not have to restate, because you are not required to have an IRS opinion letter. Perhaps you are also not required to sky dive with a parachute. Or, perhaps you are not required to measure the thickness of the river's ice before ice skating there. Okay, perhaps comparing potential death to the potential threat of sanctions and taxes is a bit extreme. you get the idea.

Now, personally, I prefer to have protection from the mafia IRS by restating the document to gain reliance on their opinion letter (or reliance letter).

Let's assume you did adopt/restate your plan in 2002, but only missed the recent April 30, 2010 deadline. The IRS fixit program, EPCRS (Employee Plans Compliance Resolution System), has a sale on now where you can pay half the filing fee if your error is fixed by April 30, 2011. They don't really call it a sale, but it's explained in section 12.03 of Revenue Procedure 2008-50. Since your restatement deadline was April 30, 2010, the Rev Proc indicates that the usual $750 fee is a mere $375 if you fix it within 12 months of its intial deadline (per plan). The cost to prepare and file the application to the IRS will likely cost much more than that for a qualified plan professional to assemble it all for you. You'll have to decide if that cost, when compared to the potential cost of disqualifying the plan, is worth it.

Hope that helps!