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

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Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater ComplianceD. Recommendations to Improve EPCRS Generally1. Improve Education and OutreachPursuant to section 1101(b)(1) of the PPA, Congress instructed the Service to increaseits education and outreach to potential users of the EPCRS, specifically to increase the“awareness and knowledge of small employers concerning the availability and uses ofthe program”. In order to do so, the Service will have to demystify the process. Thereare two ways in which the Service might do so.First the ACT recognizes and is cognizant of the fact that the Service is under budgetaryconstraints. However, the ACT is aware that effective for the 2009 plan year, Forms5500 will be submitted electronically to the DOL, which may mitigate the cost of theACT’s following suggestion: the Service should consider writing (pursuant to U.S. Mailor e-mail) to Plan Sponsors on or about the time the Plan Sponsors submit their Forms5500. All identifying information will be on the Form and, in that way, the gate-keeperswho sometimes do not always provide the most appropriate or timely information toPlan Sponsors, will be by-passed. The correspondence from the Service should be,optimally, short, informative and non-threatening. Perhaps “a top 10 questions” for thePlan Sponsor to engage in self-audit would be appropriate: for example, are the electivedeferrals made timely? Are all eligible employees given the option to be in the plan?Are all members of the controlled group accounted for, etc.?Second, there are stakeholders in the industry that the Service does not usuallyproactively engage, such as: brokers, broker-dealers and registered investmentadvisors. Consideration should be given to having a meeting at the Service NationalOffice, with no more than a dozen representatives of such constituencies, in order todetermine what would be the best forum to contact these stakeholders, en masse, andhow this might best be accomplished, e.g., trade conferences, booths, seminars, etc.2. Reporting Guidance Regarding Corrective DistributionsAs some confusion and a lack of proper reporting guidance currently exists with respectto the manner in which excess contributions and corrective distributions are reported,the ACT recommends that the Service issue a Rev. Proc. that clarifies such reportingrequirements. More specifically, the Rev. Proc. should provide and explain therequirements for reporting corrective distributions on Form 1099-R. For example, in thecase of an individual who receives a corrective distribution of a Code section 402(g)excess contribution where the violation is attributable to an employer error, there shouldbe no requirement to file an amended Form 1099-R for the year in which the excessdeferral occurred, and the Service should have the authority under EPCRS to waive thedouble-taxation of such amounts. As part of the Rev. Proc., the Service should clarifythat the 10% tax on early distributions from qualified retirement plans under Codesection 72(t) is inapplicable to these types of distributions.Such a Rev. Proc. would provide payors with greater certainty with respect to theService’s reporting requirements for corrective distributions from employer plans.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 42
Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater ComplianceMoreover, by providing more understandable corrective procedures, the Service willlikely receive more accurate reporting of corrective distributions and an increased rateof compliance.Finally, where applicable, the Rev. Proc. should provide guidance with respect tocorrective reporting related to SEPs and SIMPLE IRAs that would also affect Form5498.3. Expansion of EPCRS to Include 457(b) ProgramsThe correction programs under EPCRS are generally available to sponsors ofretirement plans that are intended to satisfy the requirements of Code sections 401(a),403(a), 403(b), 408(k), or 408(p) – i.e., tax-qualified plans, 403(b) plans, SEPs, andSIMPLE IRAs. 95 Eligible non-qualified deferred compensation plans under Code section457(b) (“457(b) plans”) are not on the list. Section 457(b) limits sponsorship of 457(b)plans to (i) states, and their political subdivisions, agencies, instrumentalities andpolitical subdivisions and (ii) other tax-exempt entities. Except in the case of a churchor government plan where 457(b) plans are often offered to a broad range ofemployees, participation in 457(b) plans is generally limited to “top-hat” employees (i.e.,management and other highly paid employees). While there are important technicaldifferences between the regulation of tax-qualified plans, 403(b) plans, SEPs, andSIMPLE IRAs, on the one hand, and 457(b) plans, on the other, these differences arerarely apparent to Plan Sponsors. Both sets of plans provide important tax-benefits thatare designed to encourage retirement savings, and both present daunting compliancechallenges.EPCRS permits correction of four broad categories of errors: Plan Document Failures,Demographic Failures, Operational Failures, and Employer Eligibility Failures. 96 TheACT proposes that EPCRS be expanded to permit correction of Plan DocumentFailures, Operational Failures, and Employer Eligibility Failures under Code section457(b). Because 457(b) plans are not subject to non-discrimination rules, a 457(b) planwould never experience a Demographic Failure.Plan Sponsors of 457(b) plans are no less committed to complying with the law than arePlan Sponsors of qualified plans, 403(b) plans, and SEP and SIMPLE IRAs, and theyare every bit as challenged by the technical complexity of the applicable rules.Essentially, EPCRS encourages the diligent operation of plans and the voluntaryidentification and correction of form and operational errors. Because these concernsapply with equal force to Plan Sponsors of 457(b) plans, the ACT recommends thatEPCRS be expanded to include 457(b) plans.95 Rev. Proc. 2006-27, § 1.01.96 See note 5.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 43
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