Q January 1997, the Internal Revenue Service announced a new procedure--the administrative policy regarding self-correction (APRSC)-for qualified retirement plans. Are all such plans included in the program?
A. Unfortunately, some plans will be excluded from the APRSC program, as described below.
INTRODUCTION TO APRSC
The new policy--part of IRS Field Directive on the Administrative Policy Regarding Self-Correction--will allow retirement plan administrators to correct operational mistakes and prevent them from turning into disqualification problems. The policy signals a change in IRS procedures regarding a plan's ongoing qualification after a disqualifying event. The IRS recognizes that the rules for qualified plan operations are complex and that plan administrators can--and do--make mistakes. Administrators now have the right to fix problems that violate the Internal Revenue Code, Treasury regulations, current legislation or the terms of the plan before the IRS enforces compliance through a plan examination or disqualifies a plan as the result of an audit. Unlike other IRS programs, there is no need to notify the agency about the error or the correction.
Before APRSC, plan administrators and sponsors had two choices to correct a violation.
1. They could apply to one of three formal IRS correction programs:
* Voluntary compliance resolution (VCR).
* Simplified VCR program (SVP).
* Closing agreement program (CAP).
2. "Insignificant and isolated" problems could be corrected under the administrative policy regarding sanctions (APRS).
Each formal program required an IRS filing and a fee. While APRS let plan administrators make certain limited corrections without an IRS filing, the correction had to put any affected participant in the same position he or she would have been in had the error not occurred. In addition, APRS could be used to correct only minor, one-time errors; most operational problems tend to be repetitive. For example, if the plan did not make required distributions under IRC section 401 (a)(9), then it had multiple violations if two or more people were required to receive a distribution.
The new policy is designed to encourage compliance by making corrections easier. APRSC generally is available for all operational violations found and corrected within the plan year following the violation year. APRSC also may be used to correct insignificant violations detected after this period. As a result, most operational violations that previously could be corrected only under VCR, SVP and CAP may now be self-corrected--even when they are significant and repetitive. The new program also may be used by sponsors of tax-sheltered annuity plans under IRC section 403(b).
Some plan violations may not be covered under APRSC:
* Form defects. These are violations that can be corrected only by plan amendments, such as failing to make required amendments before the end of the remedial amendment period.
* "Demographic" defects that lead to disqualification. These are IRC violations, including a violation of section 401 (a)(26) or section 410(b), caused by a change in the demographic make-up of the employer's workforce, such as increased staffing levels, that can be cured only by a plan amendment.
* Exclusive benefit violations. These relate to the misuse or diversion of plan assets, for example by a business owner who uses the assets to operate his or her business or some other use that is not for the exclusive benefit of plan participants. Typically, the Department of Labor has jurisdiction.
To be eligible for APRSC, a plan administrator must have established practices and procedures that demonstrate a reasonable effort to comply with the plan and the IRC. The violation in question must have resulted from an oversight or mistake in applying these procedures. This suggests that all administrative activities such as determining eligibility or allocating contributions should follow a written checklist. …