Navigating Qualified Plan Correction in Light of IRS and DOL
Differing Perspectives
By Marcia S. Wagner, Esq. and Diane Goulder Cohen,
Esq.
The Wagner Law Group, Boston, MA
Maintaining a qualified pension plan in light of the rigorous and
voluminous requirements is a challenge in and of itself. What makes
this challenge all the more oftentimes frustrating is the lack of
coordination between the two primary agencies that regulate qualified
retirement plans, i.e., the Internal Revenue Service (IRS) and
the Department of Labor (DOL). The Employee Retirement Income Security
Act of 1974, as amended (ERISA) is organized statutorily to empower
the DOL to regulate the applicable fiduciary, trust, and claims and
enforcement requirements. However, other requirements of qualified
plans concerning coverage, eligibility, vesting, funding, and
enforcement are included in ERISA but also duplicated in the Internal
Revenue Code (Code). In addition, the reporting and disclosure
requirements overlap regulation by both agencies.
The result is that certain plan provisions, when violated, come
under the regulatory authority of both the IRS and the DOL concerning
the consequences, i.e., the method of correction and the
penalties involved for violation. Recently, both agencies have been
working to improve coordination between the two primary programs
available for correction with agency approval, i.e., the
Voluntary Correction Program (VCP), part of the Employee Plans
Compliance Resolution System (EPCRS), under IRS auspices and the
Voluntary Fiduciary Correction Program (VFCP) under DOL auspices.
(See, for example, §7.3(b) of the VFCP regarding correction of a
defaulted participant loan by filing the VCP compliance statement
evidencing compliance with Code §72(p)(2) and proof of correction
for purposes of the VFCP filing.) This article will focus on one
particular aspect of the stated problem of the disconnect in
correction methodologies between the IRS and the DOL, specifically,
the calculation of earnings to make a participant whole when
determining certain corrective contributions.
As background, and as alluded to above, the IRS and DOL have
distinctly different perspectives concerning the regulation of
qualified retirement plans. The IRS's primary focus is to enforce the
many rules and regulations which govern the qualification of the plan,
predominantly Code §401(a), et. seq. The DOL's primary focus is
to regulate the fiduciary standards governing plan officials and trust
requirements. Both agencies share enforcement and reporting
requirements.
One particular operational problem which occurs frequently is the
failure to timely deposit to the plan's trust account employee
elective deferral contributions which are withheld from employee
paychecks as 401(k) salary deferral contributions. The DOL regulates
the timing of this transaction primarily through enforcement of ERISA
Regs. §2510.3-102 which sets forth the requirement that salary
deferral contributions must be deposited to the plan as of the
earliest date by which they can reasonably be segregated from the
employer's general assets. With the advent of modern technology, this
is often same day of or next day after the payroll date.
Regardless of what date is determined to be the appropriate timing,
the issues are as follows: often the employer will not know that it is
“late” making the deposits to the trust until the plan is
audited. The auditor will review the particular situation and make a
determination of what the requisite time frame is, which in most cases
is not what the employer has been doing. If, based on the auditor's
determination, the deposits have been late, the employer will need to
“make the participants whole” by contributing earnings
attributable to the late contributions.
The problem arises that the IRS and DOL do not utilize the same
methodology when calculating lost earnings. Moreover, the DOL within
its own organization does not utilize the same methodology if the
earnings are calculated as a result of audit rather than as part of a
VFCP filing. In one case, we had a client for which the DOL audit
ended mid-year. Actual plan earnings were used to make participants
whole through the end of the audit period. For the latter half of the
same year, the client filed with VFCP and utilized the DOL online
calculator to determine earnings for the latter half of the year for
the same participants and the same plan year.
The interesting dilemma that is overlaid on this scenario is if the
plan, itself, has language which mirrors the ERISA regulation cited
above regarding the timing deadline for deposit of salary deferral
contributions. If the plan so states, then failure to comply also
becomes a qualification issue. If the plan sponsor decides to file
under VCP, prior to Rev. Proc. 2008-50, the incongruent result was
that plan earnings calculated under VCP required the use of the plan's
actual earnings whereas the VFCP earnings methodology utilized the DOL
online calculator. The net result was that the same participant could
have different corrective contributions associated to the same
accounts for the same time period. A way around this anomaly was to
offer in VCP to provide to such affected participants the greater of
the two amounts, still an unwieldy exercise often requiring time
consuming calculations and comparisons.
An improvement regarding this issue as set forth in Rev. Proc.
2008-50, in part as a result of input from us on this very issue, was
an addition to
§6.02(5)(a):
(a)
Reasonable estimates. If either (i) it is possible to make a precise
calculation but the probable difference between the approximate and
the precise restoration of a participant's benefits is insignificant
and the administrative cost of determining precise restoration would
significantly exceed the probable difference or (ii) it is not
possible to make a precise calculation (for example, where it is
impossible to provide plan data), reasonable estimates may be used in
calculating appropriate correction. If it is not feasible to make a
reasonable estimate of what the actual investment results would have
been, a reasonable interest rate may be used. For this purpose, the
interest rate used by the Department of Labor's Voluntary Fiduciary
Correction Program Online Calculator (“VFCP Online
Calculator”) is deemed to be a reasonable interest rate…
.
And further in Section
6.02(2)(e)(iii):
Similarly,
in the case of a violation of the fiduciary standard imposed by Part 4
of Subtitle B of Title I of ERISA, correction under the Voluntary
Fiduciary Correction Program established by the Department of Labor
… for a fiduciary violation for which there is a similar failure
under this revenue procedure would generally be taken into account as
correction under this revenue procedure… .
As written, the acceptance of the DOL online calculator methodology
still does not help our hypothetical unless the difference in amounts
are insignificant and the administrative cost too high. Thus, although
the provision is a step in the right direction, it still falls short
of the relief actually needed as evidenced by the very typical facts
posited. However, it is a step in the right direction. Utilizing the
recognition of the DOL online calculator as a reasonable interest
rate, in tandem with the language of §6.02(2)(e)(iii), helps the
Plan sponsor to assert to the IRS VCP reviewer that the DOL online
calculator can be used more broadly for these errors, especially if
the plan sponsor is willing to make corrective contributions which are
the greater of the two amounts, i.e., actual plan earnings or
DOL online calculator earnings.
Another way to avoid the problem totally is to eliminate the ERISA
plan asset rule regarding salary deferral contributions in the plan
document. If this approach is taken, a violation would only be
correctible under VFCP, not VCP, and would thus avoid the dilemma
discussed above. Some practitioners, however, feel it is important to
state the requirement in the plan in order to provide reference
guidance to the client. The trade-off is doing so establishes a plan
provision which, if violated, then creates a failure to follow plan
terms and a qualification violation, not just a fiduciary violation.
In other words, it creates an ERISA violation as well as a Code
violation. The result is two correction forums, VCP under the IRS and
VFCP under the DOL, with the differing views as previously
discussed.
Historically in VCP, IRS reviewers would not accept earnings
calculated using the DOL online calculator. As described above,
situations arise in which the late deposit of salary deferral
contributions requires corrective filings under both VCP and VFCP, and
typically for the same errors and same plan years. The liberalization
of VCP as set forth in Rev. Proc. 2008-50 is a step forward in
reconciling this disconnect and enables plan sponsors to coordinate
correction with both agencies. Hopefully, the next iteration of EPCRS
will expand the use of the DOL online calculator even further in order
to clearly address the issues raised in this article.
For more information, in the Tax Management Portfolios, see
Wagner and Bianchi, 375 T.M., EPCRS -- Plan Correction and
Disqualification, and in Tax Practice Series, see ¶5510,
Qualified Retirement Plans -- Overview.
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