A plan sponsor of a preapproved, prototype or volume submitter defined contribution plan, including a profit-sharing, 401(k) or money purchase plan, was required to amend and restate the plan’s governing documents by April 30, 2016. See the article “Deadline Looming for Changes to Your Company’s Qualified Plan” under the Blog for Business Law dated March 3, 2016 (http://theblogforbusinesslaw.com/deadline-looming-for-changes-to-your-companys-qualified-plan). A preapproved plan is a plan document which was approved by the Internal Revenue Service (“IRS”) and sold to a plan sponsor through a bank, accounting firm, insurance company, mutual fund, stock broker, law firm or other financial institution.
If your plan was not amended by the April 30, 2016 deadline, it lost its preferential tax treatment. Potential adverse tax consequences include:
- The plan sponsor may lose some or all of its tax deductions for plan contributions.
- Participant salary reduction contributions under a 401(k) plan may be taxed.
- The trust holding plan assets will no longer be tax exempt and earnings on plan assets may be taxed.
- Distributions under the plan may not be rolled on a tax deferred basis to individual retirement accounts or other qualified plans and could be fully taxed on distribution.
Failure to timely amend a plan by the April 30, 2016 deadline can be corrected. This is done by adopting a preapproved plan document and submitting it to the IRS under the Internal Revenue Service’s Voluntary Correction Program (“VCP”). The IRS charges a user fee for processing a VCP submission which ranges from $500 to $15,000 depending on the number of plan participants. However, the fee is reduced by fifty percent if the VCP submission, for a plan that was not timely amended by April 30, 2016, is made by April 29, 2017. The schedule of IRS fees for this purpose is as follows:
|No. of Participants||Normal VCP Fee||Reduced Fee by 4/29/17||No. of Participants||Normal VCP Fee||Reduced Fee by 4/29/17|
|0 – 20||$500||$250||101- 1,000||$5,000||$2,500|
|21 – 50||$750||$375||1,001- 10,000||$10,000||$5,000|
|51 – 100||$1,500||$750||>10,000||$15,000||$7,500|
The IRS has published instructions for correcting a preapproved plan that was not adopted by the April 30, 2016 deadline under the VCP, including the IRS forms that must also be completed and submitted to the IRS as part of the VCP request. These instructions are 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.
If you would like discuss or have questions regarding the IRS VCP program for correcting a preapproved plan which was not timely amended by the April 30, 2016 deadline, please contact Larry Sewell at (314) 552-4107 or at firstname.lastname@example.org.