Correction of something other than a qualification issue

[Carol V. Calhoun]

Has anyone had experience with whether the IRS is willing to allow the VCP program to be used for something that is not a qualification issue? In the situation I'm looking at, employees were permitted to choose at retirement whether to have accumulated leave contributed to a defined benefit plan or to receive it in cash. The employer erroneously believed that in the case of the employees who chose the contribution, it would be a pretax contribution. The employer therefore did not withhold taxes on the contributions. Having now received legal advice that such contributions would be after-tax, it is attempting to fix the situation for past years.

Reading through Rev. Proc. 2013-12, I cannot see a way that VCP can be used to remedy a provision which is not disqualifying, but which caused unanticipated adverse tax consequences. However, I entered this matter late, after another firm had already prepared a draft VCP submission. I therefore want to be very sure of my ground before I talk to the client.

[PensionPro]

Any possibility this would be an operational failure?

[Carol V. Calhoun]

The only operational failure I can see is that the contributions were not treated as participant contributions for purposes of 415(n), and therefore a few participants violated the five-year limit on the purchase of nonqualified service credit. My concern is whether using EPCRS for that failure (which affects only a few participants) would clean up the withholding issue as to all participants. The description of the effects of a successful VCP are that it maintains the qualification of the plan, but the applicable revenue procedure doesn't suggest it would also provide relief for any other tax issues.

[PensionPro]

The best that I can tell only limited tax relief is available under EPCRS mostly for excise taxes and the 10% tax under 72(t) under certain circumstances. I am not sure the plan is looking for tax relief in this case. If it is not a qualification issue, then those issues would need to be resolved outside the EPCRS framework IMO. Your original post asked for reports of firsthand experience so maybe someone else can chime in.

General Rule. Except as provided in this revenue procedure, the correction programs are not available for events for which the Code provides tax consequences other than plan disqualification (such as the imposition of an excise tax or additional income tax). Sec. 6.09

[Carol V. Calhoun]

Thanks for the confirmation, PensionPro. That was my reading as well. However, given that another law firm had drafted a VCP submission that discussed only the tax issue (and didn't even mention 415(n)), I was basically looking for a sanity check.