Common Employee Benefit Plan Compliance Issues and How to Address Them

1. Common Employee Benefit Plan Compliance Issues and How to Address Them

2. Tax Consequences of Plan Disqualification When a tax-qualified retirement plan is “disqualified”, the plan’s trust loses its tax-exempt status and becomes a taxable trust. Disqualification affects three groups: ● Employees ● Employers ● The Plan’s Trust

3. Tax Consequences of Plan Disqualification (cont’d) Consequence #1 – Employees must include contributions to the plan’s trust for his or her benefit to the extent vested. (Note: some exceptions for non-highly compensated employees)

4. Tax Consequences of Plan Disqualification (cont’d) Consequence #2 – Employer deductions limited-deductions only allowed in the taxable year the benefit is paid to the participant.

5. Tax Consequences of Plan Disqualification (cont’d) Consequence #3 – The Plan trust owes income tax on earnings when “earned” by trust assets.

6. Other Consequences of Plan Errors • Participant Claims/Litigation • Beneficiary Claims/Litigation • Department of Labor Enforcement Action

7. Correction Programs Available • Internal Revenue Service (IRS) ● Employee Plans Compliance Resolution System (EPCRS) • Department of Labor (DOL) ● Delinquent Filer Voluntary Compliance Program (DFVCP) ● Voluntary Fiduciary Correction Program (VFCP)

8. IRS – Employee Plans Compliance Resolution System Consists of Three separate correction methods: • Self-Correction Program (SCP) • Voluntary Correction Program (VCP) • Audit Closing Agreement Program (Audit CAP)

9. IRS – EPCRS Self-Correction Program (SCP) • Allows self-correction of “insignificant” operational failures, at anytime and pay nofee • “Significant” failures can be corrected if done within 2 years • No application or reporting requirements • Plan must have sufficient compliance practices and procedures

10. IRS – EPCRS Voluntary Correction Program (VCP) • Available to correct one or more errors • Plan must initiate prior to notice of IRS audit/examination • Application to IRS required • Compliance fee, based on size of plan, must be paid

11. IRS – EPCRS Audit Closing Agreement Program (Audit CAP) • Available to correct errors discovered under IRS Audit • A monetary “sanction” must be paid – amount determined based on amount of tax benefits preserved

12. DOLs Delinquent Filer Voluntary Compliance Program ● Designed to encourage voluntary compliance with annual reporting requirements under ERISA (Form 5500) ● Reduced penalties determined based on reduced fee scale - Per day rate - Per “filing” cap - Per “plan cap

13. DOLs Voluntary Fiduciary Correction Program • Designed to encourage voluntary compliance by self-correcting • Available to correct 19 categories of transactions • Provides acceptable methods of correction • Must file an application and take corrective action

14. DOLs Voluntary Fiduciary Correction Program (cont’d)

15. Practical Issues • Once issue identified to counsel the matter will have to be addressed by corrective actions – audit letter responses • When in doubt correct – even if self-correct • Know your plan’s terms and follow them

17. http://www.dol.gov/ebsa/compliance_assistance.html#section8