Advisory Committee on Tax Exempt and Government Entities (ACT ...

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PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCErepresents a negotiated percentage of the tax the IRS could collect if it disqualified theplan.EPCRS is the subject of another 2008 ACT report. As reported by the project leaders,this program in its current form does not cover governmental 457(b) plans and doespermit correction of 403(b) plan document failures.The general principles of EPCRS are to encourage Sponsors of qualified retirementplans, 403(b) plans, SEPs, and SIMPLEs to establish administrative practices andprocedures that ensure that plans are operated properly in accordance with the taxqualification requirements. Sponsors and other administrators of qualified retirementplans should maintain plan documents satisfying the tax qualification requirements andmake voluntary and timely correction of any plan qualification failures. Timely andefficient correction protects participating employees by providing them with theirexpected retirement benefits, including favorable tax treatment.VI.Governmental Plan Challenges and GapsAs noted in section IV, the ACT information gathering process identified a number ofcompliance challenges and gaps faced by governmental defined contribution sponsors.Some of these challenges are common to all categories of defined contribution planswhile others are specific to a single category.Challenges and Gaps Common Across Categories of PlansChallenges faced across all categories of governmental defined contribution plansinclude preparedness for an anticipated increase in IRS audits and examinations,misinterpretation or misuse of 401(k) plan-oriented materials and programs and theabsence of a Pre-Approved Plan Program. In addition, governmental employers arechallenged by demands of administering interaction between multiple categories ofplans, a low level of awareness of IRS programs and services (small employers) and alow level of utilization of voluntary correction procedures.In addition, the following conditions challenge all stakeholders in the governmental plancommunity:• Scarcity of resources and expertise particularly among small employers• Absence of coordination across State and local agencies• Lack of employer involvement, particularly among smaller plansThe summary below provides additional information regarding these challenges andgaps:ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 20
PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCEPreparedness for Audits & ExaminationsAs noted by industry experts and IRS officials, IRS services have historically beenoriented towards private sector plans. While this may be justified in part by the largersize of the corporate market and a higher potential for abusive transactions, theemphasis puts governmental plans in a potentially precarious position with respect toaudit and examination activity. As the IRS knows, lack of preparedness for IRS auditsand examinations not only increases the probability of findings detrimental togovernmental plans, it also drives up audit cycle time, an important IRS service metric.As evidenced by comments from TE/GE Commissioner Miller, the IRS recognizes thesechallenges and has articulated plans to assist governmental plans in addressing them.This is evidenced by recent IRS TE/GE-led governmental plan outreach initiatives, andby TE/GE Commissioner Miller’s emphasis on encouraging employer initiatedcorrections.Misinterpretation or Misuse of 401(k) GuidanceA number of experts interviewed for this report noted that the IRS and Treasury haveincreased their guidance projects in recent years to the benefit of the retirement plancommunity. That said, communications regarding guidance initiatives are often gearedtoward private sector plan sponsors. As a result, governmental plans wishing to makeuse of this guidance may be confused by or incorrectly utilize guidance that wouldotherwise assist them in averting plan document and operational failures.Absence of a Pre-Approved Plan Document ProgramAs described in subsequent sections of this report, corporate 401(k) plans haveavailable a prototype plan document system which allows employers to adopt a preapprovedplan document and avoid the process of developing individually designedplans. The current Pre-Approved Plan Program is tailored to these plans and thereforemay be used erroneously by 401(a) plan practitioners who incorporate LRMs that do notapply to governmental plans (e.g. non-discrimination testing provisions). The programmay not be utilized by 457(b) plans and is under consideration for 403(b) plans. Theabsence of a prototype system for governmental plans may increase the necessity ofemployer-initiated amendments, which could increase the potential for plan failures andthus discourage governmental employers from offering a defined contribution plan,particularly among small employers.Administration of Multiple PlansA number of governmental plan experts advocated for an IRS approach that wouldprovide employers who sponsor multiple categories of plans with guidance on how suchplans are meant to interact with one another. There are no comprehensive statisticsavailable, but it is known that a high percentage of public educational employers offer atleast two types of defined contribution plans as do many state and local governments.Multiple categories of plans need to coordinate contribution limits, administer loanprovisions and facilitate permissive service credit purchases across plans.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 21
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