When the Internal Revenue Service (IRS) recently announced that it was going to start auditing 403(b) plans for the 2009 tax year, the notification, for the most part, received scant attention. After all, it’s pretty common for the IRS to start up a new audit cycle several years after the close of a particular tax year.
This time, however, things might be a bit different. That’s because the IRS gave nonprofits until December 31, 2009 to comply with the new regulations on plan documentation that it issued in 2007. At the time, some nonprofits took a close look at their plans, but others just assumed they were in compliance, even if they purchased a packaged plan and didn’t hear anything from the plan provider.
The IRS has yet to amend its Employee Plans Compliance Resolution System (EPCRS) procedures to handle this type of problem found in a plan audit. But while that might mitigate the risk if your plan is found not to be incompliance, it doesn’t eliminate it.
According to Peter Alwardt, a tax partner at accounting firm EisnerAmper in New York City and Michael Monahan and Edward Adkins of Grant Thornton LLP, nonprofits have had access to 403(b) plans for the better part of 50 years. However, in 2007, the IRS made some changes in the regulations pertaining to these types of plans, and gave NFPs until December 31 2009 for entities to restate their existing plan documents to meet the 2007 regulations.
Those final regulations required sponsors of plans that only provided for participant salary deferral contributions, and in many cases that were treated as not subject to Employee Retirement Income Security Act (ERISA), to draft a plan document and have it in place by December 31, 2009. “Many nonprofits sponsor two plans,” Alwardt said. One plan allows contributions by the organization and a second that only provides for employees to make salary deferral contributions, commonly referred to as tax deferred annuity plans. For this second type of plan, nonprofits were required, for the first time, to have a plan document drafted.
Adkins pointed out that nonprofits had plenty of warning on the changes, and sufficient time to make any necessary corrections. “The new regulations for implementing compliant plan documents were finalized in September 2007 and were scheduled to take effect for all plan years beginning after December 31, 2008 for most employers and plans. In Notice 2009-3, the IRS extended the deadline for document compliance to December 31, 2009.”
Alwardt, Monahan and Adkins agreed that much of possible current exposure risk is borne by smaller nonprofits. Alwardt explained, “Many organizations (again primarily smaller) did not get sufficient legal/advisory services in the run up to the document requirement that became effective in 2009. They relied on their investment provider, who simply generated a document based on a checklist the client prepared. There was no advice provided by the vendor who simply completed the document based on the checklist. The result has been numerous mistakes in the documents (not conforming to plan operation or intent) and many organizations ended up with salary deferral only plans being written on ERISA documents (without that being their intent) because the vendor simply put them on ERISA documents.”
The prevalence of smaller NFP entities to purchase packaged plans that were not updated to conform to the new document regulations is also the primary explanation that Grant Thornton’s Monahan offered. “We might suggest that the new regulations have posed a series of challenges to not-for-profit entities across the United States simply by virtue of the fact that this particular tax deferred annuity type retirement arrangement has historically been handled through vendor contracts for ‘product’ access and administration.”
Why Not Wait?
The 2009 tax year is the first year that the new regulations for documentation are truly in effect. And, of course, there’s no guarantee that your plan will be audited. The plain fact of the matter is that the IRS gave plan sponsors more than sufficient time to bring their plans into compliance. And the simple truth is that it’s the plan sponsor’s responsibility to be in compliance, not the IRS’s to enforce it. Waiting for the IRS to issue procedures for submitting corrections is not, according to the experts, the right path to take.
Alwardt explained that taking the initiative is a good idea. “With respect to plan documents, the IRS proposed the regulations in 2004, finalized them in 2007 and gave plan sponsors until the end of 2009 to get plan documents in place, so they have been pretty considerate of the needs of NFPs,” he said.
“They are also being fair by allowing plan failures found during an audit to be corrected under their VCP program rather than using their audit closing agreement program, which results in very severe penalties to the NFP.” He continued, “I believe they are doing this in recognition of the fact that they should have had their EPCRS amended by now to allow for the correction of 403(b) plan document failures. The IRS has been saying it will have the correction program ‘soon’ for about two years.”
In general, it’s almost always better than you find errors, rather than have someone else (like the IRS) point them out. Alwardt pointed out “the IRS is generally much more willing to work with plan sponsors that correct problems when they find them and don’t just stick their head in the sand and hope that they are not audited.”
The Self Correction Program (SCP) from the IRS permits sponsors of Qualified Plans and 403(b) Plans for which sufficient compliance practices and procedures have been established to self-correct an insignificant operational problem at any time, preserve the tax-favored status of the plan and pay no fee. Grant Thornton’s Monahan added, “Even where the problem is significant, a conscientious Plan Sponsor who, within two years of the year in which the problem occurs, both uncovers an operational problem and corrects it to a substantial degree, may preserve the tax-favored status of the plan and pay no fee.”
Monahan also said, “It certainly would make sense for NFP entities that offer 403(b) plans to their employees to review their plan documents and look for compliance with the rules. In addition, they should review their plan designs to be sure that they comply with technical design features and are administered appropriately, as well. While a plan sponsor could pay for someone to conduct a review, there is also a litany of resources available where a diligent plan sponsor can compare their current plan documents to the expectations of the IRS and determine on its own whether or not an issue exists.” NPT