IRS Modifies Compliance Resolution System

The IRS is reducing voluntary compliance program fees for some plan failures.

The Internal Revenue Service (IRS) has announced modifications to Revenue Procedure 2013-12 to make miscellaneous changes designed to improve the agency’s Employee Plans Compliance Resolution System (EPCRS).

In Revenue Procedure 2015-27, the IRS said it is reducing voluntary correction program (VCP) compliance fees relating to failures to meet requirements with respect to participant loans. In addition, the agency clarifies that for certain overpayments, as defined in sections 5.01(3)(c) and 5.02(4) of Rev. Proc. 2013-12, a plan may use correction methods other than the correction methods set forth in sections 6.06(3) and 6.06(4) of Rev. Proc. 2013-12.

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The IRS explains that Section 6.02(2) of Rev. Proc. 2013-12 provides that any correction of a failure should be reasonable and appropriate for the failure. Under correction rules described in sections 6.06(3) and 6.06(4), the employer is to take reasonable steps to have the overpayment returned to the plan. The agency says it has been informed that some plans have demanded recoupment of large amounts from plan participants and beneficiaries on account of plan administration errors made over lengthy periods of time, and that plan participants and beneficiaries, particularly those who are older individuals, may have financial difficulty meeting some corrective actions that have been sought by plan administrators, including the return of overpayments with substantial accumulated interest.

According to the IRS, some plans may be interpreting the correction rules as requiring a demand for recoupment from plan participants and beneficiaries in all cases. However, depending on the facts and circumstances, this may not be the case.

For example, depending on the nature of the overpayment failure (such as an overpayment failure resulting from a benefit calculation error), an appropriate correction method may include having the employer or another person contribute the amount of the overpayment (with appropriate interest) to the plan in lieu of seeking recoupment from plan participants and beneficiaries. Another example of an appropriate correction method includes a plan sponsor adopting a retroactive amendment to conform the plan document to the plan’s operations.

In Revenue Procedure 2015-27, the IRS also requests comments about recoupment of overpayments. Text of the document is here.

(b)lines Ask the Experts – Retirement Plans Allowed for Rural Cooperatives

“I am an adviser who primarily works with 403(b) plans. A potential client has surfaced that is like nothing I have ever seen before.

“It is a private “non-profit utility,” if you will; it provides electric service in my county in an area which presumably would not be profitable for a traditional utility to service since it is thinly populated. Have you ever heard of such an organization, and do you know what type of retirement plan it can sponsor? The entity sponsors a 401(k) currently but does not know if it is the best type of plan for them.” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:

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What you are describing appears to the Experts to be what is known as a “rural cooperative.” A rural cooperative is a tax-exempt entity that provides electric services either to the general public or on a cooperative basis via members who own units of the cooperative in exchange for providing services that contribute to the development of the entity. The entity can be public or private such as the one you are describing.

As for the type of plans it may sponsor, a rural cooperative is eligible to establish and maintain any type of qualified plan (401(k), 401(a), etc.). In addition, it may also sponsor 457(b) or 457(f) deferred compensation plan. However, one type of plan a rural cooperative may NOT sponsor is a 403(b) plan, as it is neither a 501(c)(3) charitable organization nor a public educational institution, and only those types of entities may establish and maintain a 403(b) plan.

Thank you for your question!

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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