Benefits and Compensation

IRS Gives 403(b) Plans Audit Relief, Tips on Top 10 Errors

Now that the IRS has incorporated 403(b) plans into its Employee Plans Compliance Resolution System, it is providing some plan sponsors with compliance relief, and is expanding upon some online tools it provides to help plan sponsors identify the steps they can take to help maintain their 403(b) plans.

In January, the IRS issued Revenue Procedure 2013-12, which made long-awaited revisions to EPCRS. The greatest impact from these revisions was felt by 403(b) plan sponsors, who now have the ability to correct most plan failures in the same way as qualified plans. Such failures include not adopting a written plan document on a timely basis.

The revenue procedure becomes effective on April 1, but does not apply to 403(b) plan failures that occurred before Jan. 1, 2009. Plans must use Revenue Procedure 2008-50 definitions for pre-2009 failures.

Interim Sanctions under Audit CAP and VCP

In its retirement plans newsletter, the IRS explained its interim approach for Audit Closing Agreement Program sanctions for 403(b) plan sponsors that failed to adopt a written plan before the new revenue procedure was issued. The agency used a Voluntary Correction Program or “VC-plus” approach:

VC-plus means the sanction could be slightly higher than the regular VCP fee under the revenue procedure. Under this approach, sponsors who attempted in good faith to meet the written plan requirement had lower sanctions than those who didn’t. Sanction amounts can also vary depending on whether the plan has met the requirements of Notice 2009-3.

IRS agents combined the interim sanction with the regular Audit CAP sanctions for operational failures. The IRS also stated that now that there’s a new revenue procedure, sponsors of 403(b) plans failing the written plan requirement should submit an application under the VCP.

Questions Raised on Audit Process Leading up to April 1

Director of EP Examinations Monika Templeman noted in the newsletter that she’s received many questions on how IRS will handle 403(b) written plan issues for plans currently under audit, or for new 403(b) plan audits starting before the revenue procedure’s April 1 effective date. Stating that “IRS doesn’t want to place plan sponsors in a gotcha situation,” Templeman explained that the agency has developed the following transitional relief for those plan sponsors: Plans correcting under Audit CAP may use the same compliance fee relief for written plan failures given to plans that submit for the VCP under Revenue Procedure 2013-12 (considering all facts and circumstances).

However, this relief only applies to failures to adopt a 403(b) written plan ― not operational errors.

Top 10 Plan Errors Posted

The IRS recently posted on its website a new version of a 403(b) Plan Checklist listing the top 10 plan errors, which has been expanded to include a 44-page guide on how to find, fix and avoid them. Two errors relate to failures to adopt a written plan document on a timely basis or follow plan terms. Other errors mostly relate to contribution, deferral and distribution issues.

Details on how 403(b) plans can comply with IRS regulatory requirements can be found in hrcomplianceexpert.com.

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