The Fix Is In: Common Plan Mistakes

Periodically the Internal Revenue Service (IRS) publishes an article that it calls "The Fix Is In: Common Plan Mistakes" that present common mistakes that happen in retirement plans.  These articles describe a common problem, how it happened, how to fix it and how to lessen the probability of the problem happening again.  Over the course of the next several months, we will be reproducing some of those articles that we believe would be helpful to you in the day-to-day administration of your plan.

Self-Correction Program (SCP)

SCP, a part of the Employee Plans Compliance Resolution System (EPCRS), is a correction program for resolving operational failures without any disclosure or payment of fees to the Service. If an operational failure does not meet the eligibility requirements of SCP, then the Voluntary Correction Program (VCP) is the only other option to use EPCRS. The VCP program requires full disclosure of the error, correction, and payment of a compliance fee to the Service. SCP can be used to resolve significant and insignificant violations and can even be used to resolve insignificant operational failures discovered during an audit by the Service. It is important to note that, for SEPs and SIMPLE-IRA plans, SCP is available only to insignificant failures.

Eligibility Requirements for Using SCP

Correction under SCP to fix a significant violation is available for only a limited period of time. Generally, this period is two plan years following the plan year in which the operational failure occurred. For example, if a plan's vesting requirements were violated in a plan year ending December 31, 2004, the self-correction period for significant violations would end on December 31, 2006.

There are two exceptions to the above rule. The first applies to significant failures related to transferred assets from another plan or the assumption of a plan due to a corporate merger, acquisition, or similar business transaction. SCP allows such failure to be corrected up to the last day of the plan year that begins after the corporate merger, acquisition, or similar business transaction, even if the failure occurred more than two plan years earlier. The second exception deals with the correction of the ADP test and ACP test. The two-year period for correcting ADP or ACP test violations runs after the close of the 12-month correction period that is provided by the 401(k) and (m) regulations. For example, suppose the ADP test is failed for the plan year ending December 31, 2004. The regulatory correction period ends December 31, 2005. The SCP correction period would run for two plan years beyond that, ending on December 31, 2007.

Determining if the Violation is Insignificant

Whether a violation is insignificant is determined on the basis of all the facts and circumstances. The following factors are considered in determining whether a violation is insignificant:

1.      Whether other failures occurred during the period being examined.  A particular type of operational failure affecting more than one participant is treated as one failure.

2.      The percentage of plan assets and contributions involved in the failure. The lower the percentage, the more likely the violation is insignificant.  The Service will not emphasize this factor to exclude small businesses.

3.      The number of years the failure occurred. The fewer the number of years involved, the more likely the violation is insignificant.

4.      The number of participants affected relative to the total number of participants in the plan. The lesser the percentage of participants affected; the more likely the violation is insignificant. Again, the Service will not interpret this factor in a manner that would exclude small businesses.

5.      The number of participants affected as a result of the operational failure relative to the number of participants who could have been affected by the failure. For example, the number of participants who received improper vesting upon distribution would be compared to the total number of participants who received distributions in the relevant period.

6.      Whether correction was made within a reasonable time after discovery of the failure.

7.      Why the failure occurred. Data errors, such as errors in the transcription of data, the transposition of numbers or minor arithmetic errors are more likely to be deemed insignificant.

Correction Must be Timely

Correction of significant errors should be completed within a reasonable time after discovery of the failure and, generally, no later than two years after the year in which the error occurred. SCP can also be used for significant violations if the error is "substantially corrected" by the end of the two-year period. The Service recognizes that sometimes complete correction of the failure is not possible within the two-year period and SCP relief should be available if correction is completed within a reasonable period of time thereafter. Rev. Proc. 2006-27 defines "substantially corrected" and requires that the correction meets one of the following tests:

1.      During the correction period, the plan sponsor is reasonably prompt in identifying the operational failure, formulating a correction method, and initiating correction in a manner that demonstrates a commitment of completing correction of the operational failure as expeditiously as practicable. The correction must be completed within 90 days after the last day of the correction period.

2.      During the correction period, correction is completed for at least 85 percent of all participants affected by the operational failure and thereafter, the plan sponsor completes correction of the operational failure with respect to the remaining affected participants in a diligent manner.

If correction of a significant operational failure is not corrected timely, then SCP is not available to correct the failure, but VCP is. Remember that insignificant errors can be corrected at any time. 

Availability of Correction by Plan Amendment in SCP

A plan sponsor may use SCP to correct an operational failure by a plan amendment to conform the terms of the plan to the plan's prior operations only to correct operational failures listed in Appendix B to Rev. Proc. 2006-27. These relate to violations of the compensation dollar limit, the making of hardship distributions without authorizing plan language, and the inclusion of an ineligible employee.

In the case of any correction of an operational failure through plan amendment under SCP, a plan sponsor must submit a determination letter application, identifying the amendment under SCP in the cover letter. The determination letter application must be submitted before the end of the plan's applicable remedial amendment period described in Rev. Proc. 2007-44.

Diligent Plan Administration and Prompt Correction is the Best Policy

This web page highlights the importance of conducting periodic reviews of the plan's operation and promptly fixing operational failures after they are discovered. This can reduce the cost of correction and may allow the use of the SCP to correct errors. If SCP is used, all steps taken to complete the process should be documented and retained with plan records.  Keep in mind that, despite all of your good efforts, mistakes can happen. In that case, the Service can help you correct the problem and retain the benefits of your qualified plan.

Page Last Reviewed or Updated (by IRS): September 13, 2010

 New HR Terms

Human Resources ebbs and flows, like the tide, processes and procedures go out and come back in with a few tweaks and new names.  Do you recognize these?

Enculturation is a socialization process by which new workers adjust to, and become part of, the corporate culture of their new company, office, department, etc. Also Known As:acculturate, acculturation, enculturate.

Agile Organization - An agile organization is able to quickly adapt to changing circumstances; it is ready for anything. It can respond instantaneously to changing customer demands. The agile organization innovates rapidly, and immediately tailors products and services to customer needs. Agility means nimble and quick.  How do you ensure that your organization can attract and retain resilient, agile, nimble, adaptive people?

Discretionary Energy is the energy that an employee chooses to exert in service to coworkers or customers at work - or not. An employer pays for the fundamental tasks that he hires an employee to perform. The employee's willingness to perform above and beyond the basic requirements of the job is a reflection of the employee's willingness to engage his or her discretionary energy.

Emotional Intelligence is the capacity to perceive, evaluate, understand, and control emotions in oneself and in other people.

Gen Y - Millennials are workers joining your workforce now who were born between 1980 and 2000. These developed work characteristics and tendencies from doting parents, structured lives, and contact with diverse people. Millennials are used to working in teams and want to make friends with people at work. Millennials work well with diverse coworkers.

Gen Xers are people born between 1965 and 1976 - 1980, depending on the source. Gen Xers are independent, enjoy Informality, are entrepreneurial, and seek emotional maturity. They are the core of your current workforce.

Knowledge Management is the engine that transforms ideas into business value. Knowledge management is the systematic process for acquiring, creating, synthesizing, sharing and using information, insights and experiences to achieve organizational goals.

Love Contract is a policy document signed by the two employees in a consensual dating relationship that declares that the relationship is by consent. Additionally, organizations may include guidelines on behavior appropriate at work from the dating couple. The contracts generally make arbitration the only grievance process available to the participants in the office romance. Love contracts eliminate the possibility of a later sexual harassment lawsuit when the relationship ends.

Onboarding is the process for welcoming a new employee into your organization. Onboarding, often spearheaded by a meeting with the Human Resources department, generally contains information about safety, the work environment, the new job description, benefits and eligibility, company culture, company history, and anything else relevant to working in the new company.

teTax Information for Sponsors of Retirement Plans

Reproduced from a publication of the IRS Employee Plans

DOL News

The Department of Labor's Employee Benefits Security Administration (DOL/EBSA) announced the following new guidance.

Electronic Disclosure by Employee Benefit Plans

On April 7, DOL/EBSA published a Request for Information (RFI)to solicit public comments to assist in determining whether and possibly how to expand or modify current rules regarding the electronic distribution of employee benefit plan information. Plan information, such as quarterly account statements, is required to be disclosed under ERISA.

The RFI sets forth 30 specific questions on a broad range of topics related to electronic distribution of benefit plan information. DOL/EBSA hopes to hear from plan participants and beneficiaries, employers and other plan sponsors; plan administrators, plan service providers, health insurance issuers, members of the financial community and the general public. In addition to the questions contained in the RFI, interested parties are encouraged to address any other relevant matters.

Comments are due by June 6. Written comments may be addressed to the U.S. Department of Labor, Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, 200 Constitution Ave., NW, Washington, DC 20210, Attn: Electronic Disclosure by Employee Benefit Plans RFI. Comments may also be submitted electronically by email to e-ORIdol.gov or through www.regulations.gov. Comments received to date are available on DOL/EBSA's website.

Proposed Definition of "Fiduciary" of Employee Benefit Plans

On October 22, DOL/EBSA published a proposed rule to update the definition of "fiduciary" to more broadly define the term as a person who provides investment advice to plans for a fee or other compensation. The proposed amendment would update the definition to take into account changes in the marketplace and in the practices of investment advice providers.

As the proposal notes, the 1975 rule's approach to fiduciary status may inappropriately limit DOL/EBSA's ability to protect plan sponsors, plans, participants and beneficiaries from conflicts of interest that may arise from today's diverse and complex fee practices in the retirement plan services market. The 1975 regulation may leave many employers, participants and beneficiaries who expect to receive unbiased advice unaware of the potential conflicts of interest of those who provide investment advice for a fee.

The proposed rule, which more closely reflects the statutory definition, is designed to remedy this problem, and protect plan officials and participants who expect unbiased advice, by giving a broader and clearer understanding of when individuals providing such advice are subject to ERISA's fiduciary standards.

DOL/EBSA held a public hearing on March 1 and 2 on the proposed regulation. The transcript is posted on the dedicated Web page that has public comments, the hearing agenda and testimony. The public hearing record was extended for 15 days after the transcript was posted on DOL/EBSA's website in order to afford members of the public with an opportunity to comment on issues raised at the hearing. The extended comment period has now closed. Comments received after the hearing are available on the dedicated Web page as well.

Extension of Applicability Date of Fee Disclosure Regulation

On February 11, DOL/EBSA announced its intention to extend the applicability date for the new disclosure rules under ERISA §408(b)(2) to January 1, 2012. DOL/EBSA published an interim final regulation on July 16, 2010, requiring certain service providers to employee pension benefit plans to disclose information to assist plan fiduciaries in understanding the reasonableness of the fees being charged for plan services and assess potential conflicts of interest that might affect the quality of those services.

The new requirements were previously scheduled to apply to plan contracts or arrangements for services in existence on or after July 16, 2011.

Mark Your Calendar

Stay on top of your retirement plan's deadlines! Here are some important dates in the upcoming months for calendar-year plans; non-calendar-year plans must adjust these dates.

June 30:    401(k) or 403(b) plans with an eligible automatic contribution arrangement covering all eligible employees must distribute excess contributions and excess aggregate contributions to correct failed ACP tests (and ADP tests in 401(k) plans) to avoid the Code §4979 10% excise tax.

July 15:     Defined benefit plan sponsors must make second quarterly employer contributions.

August 1:   2010 Form 5500 due

· File with DOL/EFAST2:

o Form 5500, Annual Return/Report of Employee Benefit Plan

o Form 5500-SF, Short Form Annual Return/Report of Employee Benefit Plan

· File with IRS:

o Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses)

  o Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits

o Form 5558, Application for Extension of Time to File Certain Employee Plan Return, to request a 2 ½ -month extension

Retirement Plans for Self-Employed People

Are you self-employed? Did you know you have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans? Here are highlights of a few of your retirement plan options.

Savings Incentive Match Plan for Employees (SIMPLE IRA Plan)

·          You can put all your net earnings from self-employment in the plan: up to $11,500 (plus an additional $2,500 if you're 50 or older) in salary reduction contributions and either a 2% fixed contribution or a 3% matching contribution.

·     Establish the plan:

1.      Complete

· Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) - for Use With a Designated Financial Institution, or

· Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) - Not for Use With a Designated Financial Institution, or

·    an IRS-approved "prototype SIMPLE IRA plan" offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and

2.      open a SIMPLE IRA through a bank or another financial institution.

· Set up a SIMPLE IRA plan at any time January 1 through October 1. If you became self-employed after October 1, you can set up a SIMPLE IRA plan for the year as soon as administratively feasible after your business starts.

Simplified Employee Pension (SEP)

·          Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000.

·          Establish the plan:

1.   complete

·          Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement, or

·          an IRS-approved "prototype SEP plan" offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and

2.   open a SEP-IRA through a bank or other financial institution.

Set up the SEP plan for a year as late as the due date (including extensions) of your income tax return for that year.

401(k) Plan

·          Make salary deferrals up to $16,500 (plus an additional $5,500 if you're 50 or older) of your compensation from the business either on a pre-tax basis or as a designated Roth contribution.

·          Contribute up to an additional 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000 including salary deferrals.

·          Tailor the plan to allow you access to the money in the plan through loans and hardship distributions.

·          A one-participant 401(k) plan is sometimes referred to as a "solo-401(k)," "individual 401(k)" or "uni401(k)." It is generally the same as other 401(k) plans, but because there are no other employees, other than the spouse, that work for the business, it is exempt from discrimination testing.

Other Defined Contribution Plans

·          Profit-sharing plan: allows you to decide how much to contribute on an annual basis, up to 25% of compensation (not including contributions for yourself) or $49,000.

·          Money purchase plan: requires you to contribute a fixed percentage of your income every year, up to 25% of compensation (not including contributions for yourself), according to a formula stated in the plan.

Defined Benefit Plans

·          Traditional pension plan with a stated annual benefit you will receive at retirement, usually based on salary and years of service.

·     Benefit may also be defined based on a cash balance formula in a hypothetical individual account (a cash balance plan).

·          Maximum annual benefit can be up to $195,000.

·          Contributions are calculated by an actuary based on the benefit you set and other factors (your age, expected returns on plan investments, etc.); no other annual contribution limit applies.

Retirement plans for self-employed people were formerly referred to as "Keogh plans" after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used.

Dollar figures are for 2011 and are subject to annual cost-of-living adjustments.

The presence of IRS material does not constitute or imply the endorsement, recommendation, or favoring by the IRS of any opinions, products, or services offered by the sponsor of this web page or document. 

Keyboard Shortcuts

Keyboard shortcuts are combinations of two or more keys that when pressed, can be used to perform a task that would typically require a mouse or other pointing device. Do you use Windows? Here are a few easy to learn keyboard shortcuts that can help save you a lot of time.

Show your desktop

Windows logo key + D

Instant search

Press the Windows logo key all by itself and start typing. Your computer will automatically search for apps or files that match what you type.

Get Help

The F1 button displays help.

Open "My Computer"

Windows logo key + E

Web browser shortcuts

Ctrl + D to bookmark a site, or add it to your Internet Explorer favorites.

Ctrl + F (or the F3 button) lets you find anything on a page.

Ctrl + R (or the F5 button) refreshes the active window.

In your web browser, just type the name of a site, then hit Ctrl + Enter. It will automatically fill in the "www." and the ".com" for you.

Copy, cut & paste

Ctrl + C (or Ctrl + Insert) to Copy the selected item.

Ctrl + X to Cut the selected item.

Ctrl + V (or Shift + Insert) Paste the selected item.

Take screenshots

Press the "Print Screen" button on your keyboard. It will copy that image of the open screen to your clipboard, and lets you paste it into Paintbrush or Photoshop.

See below for even more keyboard shortcuts from Microsoft and Apple!

 What would you like to see in a future issue?

Contact our office with your suggestions.

Retirement Plan Limits 

* Money purchase plans will be treated as profit-sharing plans for purposes of the IRC §404 deduction limit and will be subject to the 25% limit.