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Ask the Experts July 5, 2011
(b)lines Ask the Experts – Correcting Past Deferral Limit Violations
July 5, 2011 (PLANSPONSOR (b)lines) – “In performing a 15-year catch-up election calculation under Code Section 402(g)(7) for an individual which required us to review the employee's entire 403(b) contribution history, we discovered that the 402(g) general limit for this individual had been violated several years ago on more than one occasion, and that such excesses do not appear to have been corrected.
Reported by PS
“Since the excesses occurred so long ago, well beyond any open audit year for the plan, are we obligated to correct this error that, were it not for the participant requesting a catch-up calculation, would not have been discovered?”
Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answered:
We see your point that the error would likely have never been discovered had the calculation not been performed, but the reality is that the error HAS been discovered. Thus, although this is an issue that should clearly be reviewed with benefits counsel well versed in such matters, we believe that there would be a greater comfort level from a compliance standpoint associated with correcting the error rather than simply ignoring it and hoping that it will not be an issue because it did not occur in an “open” tax year.
The primary rationale for this statement is Section 6.02 of the Employee Plans Compliance Resolution System (EPCRS) program under Revenue Procedure 2008-50 (for those of you not familiar with EPCRS, it is basically a handbook of the procedures that a plan may utilize to correct errors) which is fairly clear as to the type of errors that should be corrected, as follows:
“Correction principles. Generally, a failure is not corrected unless full correction is made with respect to all participants and beneficiaries, and for all taxable years (whether or not the taxable year is closed).”
Thus, no distinction is made between open and closed taxable years, and indeed it is not unusual for a plan sponsor to utilize a correction program for closed tax years.
However, corrections under EPCRS can become quite complicated, so consulting with your legal and tax advisers is strongly recommended. Also, since the excesses occurred several years ago, it is certainly conceivable that alternate methods of correction that are less administratively burdensome than standard methods of correction under EPCRS could be proposed to the IRS in a formal VCP, or Voluntary Correction Program, filing.
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.