401(k): IRS Issues VCP Submission Kit for Failure to Adopt Pre-Approved Plans

On April 26, 2016, the Internal Revenue Service (IRS) released the latest in its series of VCP submission kits, which are designed to help plan administrators correct common mistakes under qualified retirement plans.  The submission kits are designed to work in tandem with the IRS Employee Plans Compliance Resolution System (EPCRS).  The latest submission kit is intended to assist employers who sponsor pre-approved defined contribution plans (such as master and prototype 401(k) plans), but who failed to adopt a new plan document reflecting changes required by the Pension Protection Act (PPA) by April 30, 2016.

Generally stated, pre-approved plans are standardized plans that have been “blessed” by the IRS and are sold by vendors, such as banks or insurance companies.  These plans usually allow adopting employers to make a variety of choices as to the plans’ provisions.  Pre-approved plans are most often amended to comply with changes required by law (such as the PPA) by the vendor, and are then submitted to the IRS for approval.  Under the Internal Revenue Code and ERISA, adopting employers then have until certain deadlines to adopt the new plan documents.  As previously stated, most employers are required to adopt PPA-compliant documents by April 30, 2016 (certain plan conversions have a later adoption deadline).

If an employer fails to adopt the new plan document by the legally required deadline, the plan risks serious consequences, including the potential to become disqualified.  Among other things, this can lead to loss of tax deductions for employers and loss of tax-free accumulations for participants.

The new compliance kit includes a list of items that must be submitted to the IRS, including a number of  IRS forms (for example, Form 8950, Application for Voluntary Correction Program (VCP) Under the Employee Plans Compliance Resolution System (EPCRS)).   Employers using the kit must follow the appropriate VCP instructions to the letter.  Employers are also required to pay a fee; for example, plans having fewer than twenty participants generally must pay $500 (fees are higher for larger plans, and fees may be reduced in certain circumstances).  The combined cost of the IRS fee, along with attorney’s and consultant’s fees in connection with the submission, can add up, but the total cost is likely to be far less than the potential costs of noncompliance with the law.

The IRS has published further, more detailed information about the latest VCP submission kit at  https://www.irs.gov/Retirement-Plans/VCP-Submission-Kit-Failure-to-adopt-a-new-Pre-Approved-Defined-Contribution-Plan-by-the-April-30-2016-Deadline.

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