The Most Common Benefits Plan Errors
There’s a cloud to the silver lining of a qualified plan’s tax advantages – the responsibility for compliance in both form and operation with the requirements of the Internal Revenue Code. Failure to meet that responsibility can lead to plan disqualification, potentially resulting in:
- Income taxation of the plan’s trust for all open years.
- The employer’s loss or postponement of deductions for contributions made to the plan during open tax years.
- For plan participants, immediate income taxation of vested contributions made on their behalf, or vested accrued benefits, as well as loss of their right to roll over distributions tax free to IRAs or other plans.
The IRS, realizing that the great majority of plan failures are likely unintentional, created the Employee Plans Compliance Resolution System (EPCRS) as a way to help plan sponsors avoid those consequences.
In the selections below, our attorneys and pension consultants walk you through EPCRS and some of the most common types of errors submitted to EPCRS for correction. How common are they? The IRS has its own “greatest hits list.”
The IRS Employee Plans Compliance Resolution System
In a perfect world, all benefits plans would operate according to the plan terms and the law. The IRS realizes this isn’t a perfect world.
Miscalculated deferrals and contributions due to a misunderstanding of the plan’s definition of compensation is an error we see regularly.
This error occurs when eligible employees have been excluded from participation in a plan, or ineligible employees have been included.
Plan Amendment Failures
Plan amendment failures are #1 on the IRS’s most common plan errors filed in its Voluntary Compliance Program.
Plan asset regulations generally state the outside limit for making plan contributions as the 15th business day of the month following the date the employer receives the contribution. Plans with less than 100 participants can have a safe harbor of 7 business days to deposit the funds once the employer receives them.
- PRESENTATION: Late Deferral Deposit Corrections
Plan Loan Failures
Unpaid, uncorrected plan loans can have consequences for both the plan participant and the plan sponsor.