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EPCRS — Plan Correction and Disqualification (Portfolio 375)

Product Code: TPOR40
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EPCRS — Plan Correction and Disqualification discusses the potentially adverse consequences of plan disqualification (in the case of tax-qualified plans, Simplified Employee Plans, and SIMPLE IRA plans) or income inclusion and related income or employment tax exposure (in the case of tax sheltered annuity plans), and describes the panoply of options available to plan sponsors when faced with plans that fail to conform to the exacting requirements that the tax law imposes on these types of plans.  

This Portfolio, written by Marcia Beth Stairman Wagner, Esq., of The Wagner Law Group, and Alden J. Bianchi, Esq., of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., also explains how sponsors of tax-qualified plans, tax-sheltered annuity plans, SEPs, and SIMPLE IRA plans may correct violations of Code §§401(a), 403(a), 403(b), 408(k), or 408(p) either through retroactive plan amendments and §7805(b) relief or by using any one or more of the correction procedures and programs that make up the Employee Plans Compliance Resolution System (or “EPCRS”).  

In addition, it includes a discussion of how a taxpayer may contest a proposed plan disqualification through the IRS and the Tax Court.  This Portfolio also  

  • Provides an historical overview and a description of plan document failures
  • Discusses Retroactive Plan Amendments, their general rules, the limitations of §401(b), and the timing of retroactive plan amendments
  • Explains the advantages of the IRS’s self-correction and voluntary correction programs
  • Details the advantages and disadvantages of the DOL’s VFC program 

EPCRS — Plan Correction and Disqualification allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
  • Invaluable practice documents including tables, charts and lists
  • Plain-English guidance from world-class experts
  • Real-world and in-depth analysis that lets you explore various options
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
  • Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offers commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Buy EPCRS — Plan Correction and Disqualification (Portfolio 375) now.

Detailed Analysis

I. Plan Disqualification - Effects of Plan Disqualification

Introductory Material

A. Timing of Disqualification

B. Effects of Disqualification

1. Effect of Disqualification on the Trust

a. Standard Trust Arrangement

b. Annuity Contracts

2. Effect of Disqualification on the Employer

a. Loss of Deductions

(1) Separate Share Requirement

(2) Employer Deduction Based on Inclusion in Employees’ Income

b. Deduction Carryover

c. Withholding Obligations and Employment Taxes

d. Employee Suits Against Employer Qualification Violations

e. Loss of Securities Registration Exemption under the Securities Act of 1933

3. Effect of Disqualification on Plan Participants

a. Vested Status

(1) Defined Contribution Plans

(2) Defined Benefit Plans

(3) Employees’ Interest in Trust Changing from Non-vested to Vested

(4) Basis

(5) Effect of Including Vested Contributions in Participants’ Income

b. Annuity Contracts

c. Trust Changing from Tax-Exempt to Non-Tax-Exempt

d. Disqualifying Events that Affect Only Highly Compensated Employees

e. Distributions from Nonqualified Plans

f. The Duty of Consistency

II. The Disqualification Process

Introductory Material

A. Appeals Office

B. Tax Court

1. Taxpayer Must Exhaust Administrative Remedies Before Petitioning Tax Court

2. Declaratory Judgment by the Tax Court

III. A Taxonomy of Plan Defects - Historical View

Introductory Material

A. Plan Document Failures

1. Development

2. Single Year Defects

B. Operational Failures

1. Explanation

2. Carryover Defects

C. Demographic Failures

IV. Retroactive Plan Amendments, 7805(b) Relief and Closing Agreements Under 7121

Introductory Material

A. Retroactive Plan Amendments

1. General Rule

2. Limitations of 401(b)

3. Timing of Retroactive Plan Amendment

a. Plans Maintained by One Employer

b. Plans Maintained by More Than One Employer

c. Master and Prototype Plans

d. Tax Exempt Employers

4. Disqualifying Provisions Defined

a. Taxpayer Relief Act of 1997

b. Other IRS Guidance

c. GUST

d. EGTRRA

5. Position of the Department of Labor

6. Discretionary Extensions

a. General Rule

b. Judicial Extension of 401(b) Remedial Amendment Period

B. Discretionary Relief Provisions for Certain Qualification Rules

1. Violations of 415

2. Violations of 401(a)(4), 410(b) and 401(a)(26)

3. Violations of 401(k) and 401(m)

4. Partial Termination

C. Section 7805(b) Relief

1. Background

2. Section 7805(b) Relief Is Discretionary

3. Section 7805(b) Relief in Employee Plans Area

a. Section 7805(b) Relief when Determination Letters or Private Letter Rulings Have Been Issued

b. Beyond Traditional 7805(b) Principles

(1) Individual Cases

(2) Class Relief

(a) ERISA Noncompliance Enforcement Program

(b) Relief Related to Changes in the Law Under TEFRA, DEFRA and REA

4. Obtaining 7805(b) Relief

D. Closing Agreements

1. Introduction

2. Eligibility

3. Closing Agreement Procedures

4. Closing Agreements for a Class of Plan Sponsors

a. Small Plans Actuarial Audit Cases

b. Pension Plans Invested in Troubled Insurance Companies

V. The Development of Voluntary and Audit Correction Mechanisms

Introductory Material

A. APRS and APRSC

B. The Voluntary Compliance Resolution Program (VCR) and the Standardized VCR Program (SVP)

C. CAP

1. The Closing Agreements Pilot Program/Audit CAP

2. Walk-in CAP

D. The Tax Sheltered Annuity Voluntary Correction Program (“TVC”)

E. Consolidation into EPCRS

1. Rev. Proc. 98-22

2. Rev. Proc. 99-31

3. Rev. Proc. 2000-16

4. Rev. Proc. 2001-17

5. Rev. Proc. 2002-47

6. Rev. Proc. 2003-44

7. Rev. Proc. 2006-27

F. Other Compliance Programs and Initiatives

VI. The Employee Plans Compliance Resolution System - Basic Features

Introductory Material

A. Overview of EPCRS Corrections and Programs

B. Effect of EPCRS and Reliance

C. Eligibility and Threshold EPCRS Requirements

1. Program Eligibility - EPCRS Correction Programs are Available for All Types of Failures

2. Plans Under Examination

3. The Favorable Letter Requirement

4. Established Practices and Procedures

5. Correction by Plan Amendment

6. Egregious Failures/Diversion of Plan Assets

7. Diversion or Misuse of Plan Assets

8. Failures Related to Abusive Tax Avoidance Transactions

D. EGTRRA Non-Amenders

E. Scrivener's Errors

F. Correction Principles

G. Eligibility Failures

H. Correction of a Failure to Obtain Spousal Consent

I. Special Rules Relating to Excess Amounts

J. Plan Loan Failures

K. Correction Under Statute or Regulation

L. Excise Taxes and Additional Income Taxes

M. SEPs and SIMPLE IRA Plans

N. Restorative Payments

VII. EPCRS - Correction Programs

Introductory Material

A. Self-Correction Program (SCP)

1. Self-Correction of Insignificant Operational Failures

2. Self-Correction of Significant Operational Failures

3. Special Case - Self Correction Involving Transferred Assets

4. Documenting the SCP Correction

B. Voluntary Correction with Service Approval

1. The VCP Submission

2. The VCP Compliance Statement

3. Anonymous (John Doe) Submissions

4. Group Submissions

5. Multiemployer and Multiple Employer Plans

6. VCP Application Procedures

7. VCP Fees

8. Source of Payment of Compliance Fees

C. Correction on Audit (Audit CAP)

VIII. EPCRS Model Correction Methods and Earnings Adjustments

Introductory Material

A. Correction Methods Under Appendix A

1. Failure to Provide Minimum Top-Heavy Benefit To Non-key Employees

2. Failure to Satisfy ADP, ACP, or Multiple Use Test

3. Failure to Distribute Excess Elective Deferrals

4. Exclusion of Eligible Employees

a. Plans Providing Benefits Not Subject to 401(k) or (m)

b. Plans Providing Benefits Subject to 401(k) or (m)

c. Plans Providing for Treatment of Elective Deferrals as Designated Roth Contributions

d. Plans Providing for Catch-up Contributions Only

e. Plans Failing to Implement Employee Election

5. Failure to Timely Pay Minimum Distribution

6. Missing Participant or Spousal Consent for Distributions

7. Excess Annual Additions in Defined Contribution Plans

8. Abandoned Orphan Plans

B. Correction Methods Under Appendix B

1. ADP, ACP, or Multiple Use Test Failures

2. Exclusion of Eligible Employees

a. Section 401(k) or (m) Plan

b. Profit-Sharing or Stock Bonus Plan

3. Vesting Failures

4. Qualified Plan Excess Participant Benefit or Contribution Failures

a. Excess Participant Benefits from Defined Benefit Plans

b. Excess Annual Additions to Defined Contribution Plans

(1) Forfeiture Correction Method

(2) Return of Overpayment Correction Method

5. Correction of Other Overpayment Failures

6. Section 401(a)(17) Failures

7. Correction by Amendment

a. Section 401(a)(17) Failures

b. Hardship Distribution Failures and Plan Loan Failures

c. Early Inclusion of Otherwise Eligible Employee Failure

C. Model Earnings Adjustments

1. In General

2. Earnings Rate

3. Allocation Methods

IX. Department of Labor Voluntary Correction Program

Introductory Material

A. Origins and Background

B. Program Eligibility and Application Procedure

C. General Rules for Acceptable Corrections

D. Specific Corrections Under VFC

E. VFC Program Advantages and Disadvantages

F. Excise Taxes

Working Papers

Table of Worksheets

Worksheet 1 Self-Correction - Sample Notice/Election Form Package for Married Participants for Correction of Failure to Obtain Spousal Consent

Worksheet 2 Internal Revenue Manual (IRM) 7.2.2 Employee Plans Compliance Resolution System (EPCRS) and Sample Closing Agreement

Worksheet 3 Self-Correction - Outline for Correction of Delayed Enrollments and Re-Enrollments

Worksheet 4 Self-Correction - Options for Dealing With Missed/Incorrect Enrollments and Contribution/Investment Election Changes

Worksheet 5 [Reserved]

Worksheet 6 Sample VCP Submission

Worksheet 7 IRS Employee Plans Division Field Directive Setting Guidelines on Limited Circumstances Under Which Service May Accept Payment from Trust Assets of Sanctions Under Closing Agreement Program, Issued March 14, 1995

Worksheet 8 Partial Termination - Sample Fact Pattern and Closing Agreement

Bibliography

OFFICIAL

Statutes:

Regulations:

DOL Regs.:

Acts:

Legislative History:

Notices:

Announcements and General Counsel Memoranda:

Treasury Rulings:

Cases:

Tax Management Portfolios:

Other Rules:

Miscellaneous:

UNOFFICIAL

Articles:

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1975

1983

1986

1989

1991

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2003

2006

2008

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Alden J. Bianchi
Alden J. Bianchi, B.S., Worcester Polytechnic Institute (1974); J.D., Suffolk Law School (1978); LL.M., Georgetown Law Center (1979); LL.M. (tax), Boston University School of Law (1984); Employee Benefits Committee of the American Bar Association Tax Section; Massachusetts Bar (1978), Illinois and District of Columbia Bars (1979).
Marcia S. Wagner
Marcia Beth Stairman Wagner, B.A., summa cum laude, Cornell University (1984); J.D., Harvard Law School (1987), Law and Economics Fellow; Employee Benefits Committee of American Bar Association Tax Section; Tax Section Counsel, Massachusetts Bar Association; Pension Liaison Committee, IRS Key District Office, Brooklyn, New York; Massachusetts and District of Columbia Bars (1987).