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Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater ComplianceV. RECOMMENDATIONSA. Recommendations to Improve the Self-Correction Program1. Extension of Self-Correction Period for Significant OperationalFailures to the Last Day of the Third (3 rd ) Plan Year in Which theFailure OccurredProvided that certain conditions are met, plans which are found to have insignificantand/or significant Operational Failures may voluntarily correct the Plan Failures underthe SCP. Insignificant Operational Failures discovered during a Service audit may alsobe corrected pursuant to the SCP. Self corrections require no disclosure to the Serviceand no payment of fees or sanctions.Because the Service has not provided a clear definition of “insignificant” or “significant,”the determination tends to be subjective. Several factors to be considered indetermining whether an Operational Failure is insignificant or significant include:(1) whether other Plan Failures occurred during the same period; (2) the percentage ofplan assets and contributions involved in the Plan Failure; (3) the number of years thePlan Failure occurred; (4) the number of Participants affected by the Plan Failurerelative to the total number of Participants in the plan; (5) the percentage of planParticipants potentially affected as a result of the Plan Failure; (6) whether correctionwas made within a reasonable time after discovery of the Plan Failure; and (7) thereason for the Plan Failure. 49 No single factor is determinative. 50Insignificant Operational Failures may be corrected at any time after they arediscovered. However, voluntary self-correction for significant Operational Failures isavailable only for a limited period of time. Generally, a significant Operational Failuremust be corrected by the end of the second plan year following the plan year in whichthe Operational Failure occurred. 51 Special rules apply to determine the period forcorrecting a failed average deferral percentage (“ADP”) or average contributionpercentage (“ACP”) test and for correcting Plan Failures related to assets transferreddue to a corporate merger, acquisition or similar business transaction.The initial discovery of an Operational Failure often occurs many years after the PlanFailure began. This is especially true for smaller employers who do not maintainprofessional benefits personnel and employers who utilize a lowest cost approach whenselecting a third party administrator. Employers who charge administration fees back tothe plan may feel compelled to find the least expensive way to maintain their qualifiedplan to avoid criticism. These considerations, as well as the complex and changingnature of Service regulations, and turnover among the persons responsible for qualified49 Rev. Proc. 2006-27, § 8.02.50 Id.51 Rev. Proc. 2006-27, § 9.02.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 20
Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater Complianceplan oversight, combine to create and perpetuate plan errors, sometimes for manyyears.Some practitioners believe that certain Plan Sponsors, especially smaller employers,are not properly correcting significant Operational Failures because the Plan Failure isdiscovered more than two years after it began. 52 Under EPCRS guidelines, such a PlanFailure requires the use of the VCP, which: 1) carries the perception (although false) ofincreased audit risk because the filing requires a detailed explanation of noncompliance;2) requires payment of professional fees to prepare and submit the filing, sometimesexceeding the correction amount; 3) requires use of internal time and resources tocollect data, find terminated Participants, and provide the professionals with adequateinformation to produce the VCP filing; and 4) may bring further delays in correction dueto long processing times. Thus, the existing rules may actually encourage an employerto either partially or completely correct the Plan Failure without making the requiredVCP filing or correct the Plan Failure prospectively without correcting for past years inorder to reduce exposure without increasing the employer’s perceived probability ofaudit.Congress clearly suggested (if not directed) the Service to extend the duration of theself-correction period for significant Operational Failures. The PPA requires theSecretary of the Treasury to “continue to update and improve EPCRS” and specificallydirects the Service to pay “special attention … to extending the duration of the selfcorrectionperiod under the Self-Correction Program for significant ComplianceFailures.” 53 Of the many facets of EPCRS, Congress chose to single out the durationof the self-correction period.The ACT believes that, if a Plan Sponsor is willing to undertake the risk and cost of selfcorrection,it should be given a greater opportunity to do so than that currently affordedunder the EPCRS. Many benefits to the Service, Plan Sponsors, and plan Participantswill follow an extension of the duration. An extension will allow and encourage PlanSponsors to comply with the requirements of the Internal Revenue Code. It will alsodecrease the volume of VCP filings, reducing the backlog of an overloaded andunderstaffed Service.While the ACT understands the concern of some within the Department of Treasury andService that such an extension will simply mean the Plan Sponsor has another year tomake the correction it could have made earlier, it is not the experience of the individualACT members that Plan Sponsors with known Plan Failures delay correction until thelast possible date. Many errors are not discovered until the second year and any delaywould push the Plan Sponsor beyond the current deadline. Delays often increase thetotal cost of correction because of accruing interest on corrective contributions,increased fees paid to consultants and counsel, and communication difficulties that can52 These comments were made by practitioners responding to the ACT’s BenefitsLink survey, see notes 47 and 48.53 PPA, §1101(b)(3).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 21
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Withholding RequirementsACCOUNTING
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