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

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PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCEGovernmental Plans’ Lack of Awareness of IRS Programs & ServicesMany experts contacted by the ACT expressed the opinion that that the governmentalplan community does not realize the full benefits of services the IRS has added. Again,this is particularly true among smaller employers. These employers, and perhaps eventheir service providers, are less apt to be aware of the IRS EP web site and of IRSoutreach and education activities. Small plans, which are largely dependent on theexpertise of their service providers, would likely benefit from any effort that resulted inimproved awareness of IRS requirements and programs. To the extent that suchobservations are accurate, increased outreach through groups such as State chaptersof governmental employer organizations, retirement plan associations, school boardsassociations and school administrators associations will provide some marketpenetration with smaller employers.Low Utilization of Voluntary Corrections ProceduresThe IRS provides correction procedures for written plan document failures to 401(k)plans in the form of Employee Plans Compliance Resolution System (EPCRS). Thissystem is not available for 457(b) plans. However, 457(b) plans may pursue correctionsthrough other means. If applied to 403(b) EPCRS may need to be modified to fitspecifics of 403(b) (e.g. potential failure by one participant w/small balance in a failedannuity contract). The IRS has developed a 401(k) Fix-it Guide, which would also be auseful correction tool for governmental plans if it were designed as such. Generally,most experts contacted by the ACT believe that IRS correction programs are either notoriented adequately to the governmental sector or the benefits of these programs arenot well understood in the government sector or they are inadequately marketed.The following challenges and gaps are specific to specific categories of plans:403(b) PlansEmployer preparedness for the new 403(b) regulations represents a significantchallenge. A number of industry groups, including the SPARK Institute, have advocatedfor a postponement of the effective date of the new 403(b) regulations to beyondJanuary 2009. Assuming the effective date of January 1, 2009, stakeholders haveexpressed concerns about the absence of a remedial amendment period (“RAP”) for403(b) plans, the absence of prototype or pre-approved plan document system,shortcomings in the model 403(b) plan document language and shortcomings incorrection procedures. As noted in section V of this report, the IRS is considering a Pre-Approved 403(b) Plan program.401(a) Defined Contribution PlansAs evidenced by responses to the ACT Benefits Link survey, the following challengeswere in evidence for 401(a) defined contribution plans:• Erroneous inclusion of 401(k) plan provisions due to erroneous use of the preapprovedplan programADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 22
PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCE• Utilization of a flawed specimen plan• Documents incorrectly amended or not amended when tax laws changeThe ACT and the IRS have received anecdotal information and comments that point toconfusion in the area of qualified plans adopted by governmental entities caused in partby the fact that the current pre-approved plan document program does not provideinformation on the Code provisions that do or do not apply to governmental entities. Asthe 401(a) survey results pointed out, 401(a) plan document failures occur becausepractitioners mistakenly utilize the 401(k) prototype system when the provisions (LRMs)clearly do not apply (e.g. non-discrimination testing).457(b) PlansChallenges for IRC section 457(b) plans related to a lack of coverage under EPCRS,the absence of a comprehensive publication that describes 457(b) plans and confusionabout the distinctions between governmental versus non-governmental section457provisions.VII.IRS Government Plan InitiativesThis report does not provide detail on initiatives the IRS TE/GE Division has undertakento assist governmental plans in their mission of protecting employee plan benefits.However, the IRS has undertaken a number of initiatives and programs that were citedby governmental plan advocates as providing a strong foundation and having a positiveimpact on employers.IRS-led initiatives include the delivery of increased guidance (from IRS and Treasury) toprovide governmental employers with clarification on new and existing laws andregulations. The IRS has also significantly increased its outreach to employers throughits web site, electronic newsletters and staff presentations at various conferencesaround the country. Recently, the IRS TE/GE Division added new and usefulgovernmental plan information to the EP section of its web site. During the course of theACT’s data gathering, industry experts noted an increase in the amount of IRSpublications that are useful to retirement plan service providers. One such publication isthe “Choose Retirement Plan for Employees of Government and Tax-ExemptEmployers” brochure.In the area of plan design, the issuance of a 403(b) sample plan and EGGTRA modelamendments for 457(b) plans is assisting employers and service providers indeveloping plans that incorporate up-to-date requirements and benefits. The IRS TE/GEDivision has also increased its partnerships with governmental employers, practitionersand industry organizations, a step that is necessary to understanding employer needsand delivering high quality, cost-effective programs. This was most recently evidencedby the IRS-led Governmental Plans Roundtable, which was held on April 22, 2008.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 23
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