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

Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater Compliance3. Failure to satisfy Code section 415;4. Failure to amend plans for compliance with Code section 132(f)(4); and5. Failure to satisfy plan loan requirements.The ACT believes that adding a fixed fee for correction of the above failures wouldpromote compliance where Plan Failures are insignificant. For example, suppose that aPlan Sponsor with over 10,000 Participants discovers that there are 5 Participant loanPlan Failures. At the present time, any Participant loan Plan Failures must be correctedthrough VCP; there is no correction principle available under SCP. Currently, this PlanSponsor will be required to pay a compliance fee of $25,000, even though the cost ofcorrection will be only a few hundred dollars. Plan Sponsors, especially largeemployers, will make the corrections, but may not be willing to file under VCP for ahandful of loan Plan Failures when the fee is disproportionately high.2. Suggested Substantive Changes to VCPa. Addition of QSLOB Corrections To VCPUnder the Internal Revenue Code, one of the requirements for an employer to betreated as operating a qualified separate line of business (“QSLOB”) for purposes ofmeeting various coverage and nondiscrimination requirements is that a notice must betimely filed with the Service not later than 10 months after the end of the applicable planyear. 63 The notice is required to be updated annually if a QSLOB changes or the PlanSponsor no longer maintains a QSLOB. The notice requirements are specified inregulations under Code section 414(r). 64Currently, IRS Form 5310-A is the form used to comply with the above-described noticerequirements. A 5310-A is utilized for the initial notice, modifications to the initial notice,and revoking the notice of treatment as a QSLOB. If the notice is not timely filed, thePlan Sponsor will not be treated as operating a QSLOB for purposes of meeting theapplicable coverage and nondiscrimination requirements and the plan will bedisqualified for a Demographic Failure, since a QSLOB is generally used when thegeneral Code section 410(b) coverage tests cannot be met.A Plan Sponsor can request an extension of the time to file the QSLOB election, if thePlan Sponsor makes the request before the Plan Failure is discovered on audit andprovides “evidence . . . to establish to the satisfaction of the Commissioner that thetaxpayer acted reasonably and in good faith, and the grant of relief will not prejudice theinterests of the Government”. In order for the Plan Sponsor to be deemed to haveacted reasonably and in good faith, it would have to show that the failure to make theelection (i.e., file the 5310-A) occurred because of intervening events beyond its control,63 Code § 414(r)(2)(B) (2007). 64 Treas. Reg. §§ 1.414(r)-1(b)(2)(iv)(C), -4(c) (2007). ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 30