Correcting Common Mistakes In Multiemployer Plans

The Internal Revenue Service ("IRS") recently shared a list of common mistakes it finds when examining multiemployer defined benefit and defined contribution plans. Diane S. Bloom, a tax law specialist with the IRS, noted that while administrative errors are no more common in multiemployer than in other types of plans, certain types of mistakes are more prevalent in multiemployer plans.

Common multiemployer plan errors Ms. Bloom identified include:

· failure to properly track service credits;

· incomplete participant data needed to calculate benefits;

· failure to distribute benefits;

· failure to get a qualified joint and survivor annuity waiver from spouses of plan participants;

· failure to credit interest due on suspended benefits;

· enhanced benefits not documented with a written plan amendment;

· benefit reductions that violate the anti-cutback rules;

· inconsistencies between the plans' written documents and outside agreements; and

· impermissible plan features, such as a money purchase plan with a 401(k) feature.

Plan sponsors frequently may correct these mistakes without an IRS filing. The IRS correction program, known as the Employee Plans Compliance Resolution System ("EPCRS"), allows plan sponsors to voluntarily self-correct certain errors that could affect the tax-qualified status of the plan. Often, these corrections impose relatively little burden on the plan sponsor. EPCRS outlines procedures for self-correction provided certain eligibility requirements are met. EPCRS also provides methods for correcting by voluntarily submitting the plan to the IRS for review and paying a specified compliance fee.

The following questions and answers provide an introduction to how the EPCRS program works:

Q. What are the procedures for self-correcting a mistake?

A. Generally, the principles of EPCRS require the plan sponsor to put the plan and participants back in the position they would have been if the mistake had not occurred. The plan trustees should document in detail how and why the mistake occurred and the method used to correct the mistake. Under self-correction, the IRS does not review the plan and no fee payment is necessary.

Q. Does the IRS mandate how certain mistakes must be corrected?

A. Yes, EPCRS discusses a number of common mistakes and the approved method of correcting these common mistakes. If your plan's mistake is not the same as or sufficiently similar to one of those covered in EPCRS, it is usually recommended that the plan trustees submit the failure and proposed method of correcting to the IRS for review.

Q. What are the eligibility requirements for self-correction?

A. An "insignificant" mistake can be self-corrected at any time. If the mistake is "significant," it must be corrected no later than the last day of the second plan year following the plan year in which the mistake occurred. A significant mistake is eligible for self-correction only if the plan has a favorable IRS determination letter.

Seven factors are used to determine whether a mistake is insignificant, including the number of participants affected, the number of plan years affected, and the amount of assets involved. Self-correction is rarely permitted if a retroactive amendment to the plan is required to conform the documents to actual operation. A failure to timely adopt a plan amendment to comply with federal law cannot be self-corrected.

Q. What if the plan does not qualify for self-correction?

A. If your plan's mistake is not eligible for self-correction, EPCRS includes procedures for submitting the plan under a Voluntary Correction Program ("VCP"). Although the general principles of correcting apply under VCP as well, the detailed explanation of how and why the mistake occurred and the proposed method of correcting is submitted to the IRS for its review before the correction is completed. The plan sponsor must submit the entire plan to the IRS for review rather than a portion of the plan affecting any particular employer. In addition, the plan must pay a fee to the IRS based on the number of participants in the plan. If the mistake does not apply to all employers participating in the plan, sometimes the fee may be calculated separately for each employer based on the assets in the plan attributable to that employer. Once the IRS and plan sponsor agree to the method of correction, both parties sign a compliance statement agreeing to complete the correction within 150 days.

Q. What are the advantages of voluntarily correcting mistakes under EPCRS?

A. The IRS strongly promotes voluntary correction of mistakes in qualified plans to retain the integrity of retirement benefits. Once the plan is the subject of an examination, the procedures under EPCRS are no longer available to the plan, and the lenient EPCRS fees and correction procedures are unavailable. Ms. Bloom also noted that the IRS is enhancing training for agents on multiemployer plan issues.

Q. What is the cost to correct an error discovered during an IRS audit?

A. If the IRS finds an issue on audit, sanctions are a negotiated percentage of the maximum amount of tax the IRS could collect if the plan were disqualified. These sanctions can be severe and are determined based on criteria such as the type and extent of the failure, steps taken by the plan sponsor to prevent failures, steps taken by the plan sponsor to identify and correct failures, and the number of non-highly compensated participants affected by the failure. For a failure to amend the plan on a timely basis to comply with federal law, the IRS has published the compliance fees (in Revenue Procedure 2006-27) based on the size of the plan and the non-amender failure, as follows:

Number of Participants	EGTRRA / subsequent legislation	GUST / 401(a)(9) Regs.	UCA / OBRA '93	TRA '86	TEFRA / DEFRA / REA	ERISA
20 or less	$2,500	$3,000	$3,500	$4,000	$4,500	$5,000
21-50	$5,000	$6,000	$7,000	$8,000	$9,000	$10,000
51-100	$7,500	$9,000	$10,500	$12,000	$13,500	$15,000
101-500	$12,500	$15,000	$17,500	$20,000	$22,500	$25,000
501-1,000	$17,500	$21,000	$24,500	$28,000	$31,500	$35,000
1,001-5,000	$25,000	$30,000	$35,000	$40,000	$45,000	$50,000
5,001-10,000	$32,500	$39,000	$45,500	$52,000	$58,500	$65,000
Over 10,000	$40,000	$48,000	$56,000	$64,000	$72,000	$80,000

Plan trustees should take measures as soon as possible to correct any mistakes of which they become aware. If your plan has not had an independent audit in the recent past, we recommend that you consider this step. Ice Miller's Employee Benefits Group is experienced in conducting plan compliance audits. If you would like more information about conducting a plan audit or how to take advantage of IRS correction programs, please contact Stephanie Smithey.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.