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

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Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater Compliance• The calculation is made as follows:oooFirst Quarter – principal amount is multiplied by thefirst applicable factor;Second Quarter – principal amount plus the earningsdetermined for the first quarter are multiplied by theapplicable factor; andSubsequent Quarters – the principal amount plus theearnings as of the end of the quarter immediatelypreceding the one being calculated are multiplied bythe applicable factor until the recovery date isreached.• If the lost earnings are paid to the plan after the recoverydate, the earnings are calculated from the recovery date tothe payment date by the same method as discussed above,except that earnings begin on the recovery date and end onthe payment date. The amount of interest is calculated onthe lost earnings instead of on the principal.Note, if the lost earnings plus interest on lost earnings exceed $100,000, the amountmust be redetermined using interest as set forth under Code section 6621(c)(1) insteadof 6621(a)(2).The ACT understands that, in part, the Service is concerned that the DOL calculationwill not fairly reflect plan earnings, especially in years when returns are above average.The ACT suggests that the Service and DOL coordinate in order to determine if anymodifications can be made to the calculator to assuage the Service’s concerns that,consistent with its philosophy, Participants should be made whole. However, the ACTbelieves that, at a minimum, any qualification errors brought to VCP which alsoconstitute ERISA violations enforceable by the DOL should be allowed and encouragedto utilize the DOL online calculator as an efficient means of correction for the sameerror.Further, even for those operational errors which do not constitute DOL enforceableviolations, the DOL online calculator is an efficient instrument for calculation of lostearnings and falls under the language of “…other earnings adjustment methods,different from those illustrated in this section 3…” per the actual language of the Rev.Proc. 70 VCP reviewers should accept the use of the online calculator and EPCRSshould confirm the DOL online calculator as an acceptable correction method.70 Rev. Proc. 2006-27, App. B, § 3.01.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 34
Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater Compliancec. Correction of Exclusive Benefit Rule ViolationsThere have been increasing instances of: (i) employers learning years after the fact thatproceeds or returned money were not identified as qualified plan assets at the time ofreceipt (e.g., demutualization of an insurance company), (ii) employers receiving andretaining money or proceeds after a plan termination, (iii) employers receiving proceedsdue to a plan, years after the Participants to whom the money should have beenallocated have severed from service (e.g., litigation settlements, a limited partnershipinterest that had been assigned a minimal value but liquidates with a significant value,the receipt of dividends on assets of a plan long terminated, etc.). By the time the erroris discovered, the assets may have been held by the Plan Sponsor for an extendedperiod of time.These cases are not available for correction under VCP because they are most likely adiversion of plan assets, categorized as an exclusive benefit violation. These cases arealso not currently available for correction under the DOL VFCP as a listed correctabletransaction.The ACT is reluctant to propose that this error be added as Plan Failure correctableunder the VCP, because specifically excluded from VCP, unless otherwise specificallyincluded, are matters for which a tax consequence other than disqualification applies. 71Prohibited transactions are specifically excluded. In addition, diversion of plan assets(exclusive benefit violation) is specifically excluded from SCP, VCP and Audit CAP. 72The ACT believes that the Service should consider adding, as correctable under VCP,the inadvertent retention of assets such as in the demutualization cases. The Act alsorecommends that if the inadvertent retention of plan assets, such as a demutualizationerror, is corrected under the DOL VFCP, the Service and the DOL should coordinatetheir efforts in a manner similar to PTCE 2002-51 and the Amendment to PTCE 200251 regarding late deposit of Participant elective deferral contributions, i.e., voluntarycorrection accomplished and approved by both the Service and DOL through propervoluntary filings, notices, reporting, and/or payment of excise taxes.d. Expansion of VCP to Non-ERISA Form 5500 FilersIf a plan administrator complies with the Delinquent Filer Voluntary Correction programsponsored by the DOL (the “DFVCP”), the administrator is relieved of Service penaltiesfor the delinquent IRS Form 5500 filings. 73 However, if a plan is not subject to ERISA’sTitle I reporting requirements (i.e., IRS Form 5500-EZ filers and IRS Form 5500 filers forplans without employees), the DFVCP is not available 74 and the plan cannot obtain relieffrom Service penalties for delinquent filings. Filers of IRS Form 5500-EZ are typically71 Rev. Proc. 2006-27 § 6.09.72 Rev. Proc. 2006-27 § 4.12.73 I.R.S. Notice 2002-23.74 DFVC Program, § B3.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 35
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