IRS clarifies plan correction options for 457 plans

The IRS has clarified the circumstances under which the IRS Employee Plans Voluntary Compliance (VC) team will consider requests for voluntary correction for Code Sec. 457(b) plans. According to Rev. Proc. 2013-12, some plan sponsors, under limited circumstances, may submit requests for voluntary correction to the IRS for their Code Sec. 457(b) retirement plans. The VC team will consider these requests on a provisional basis outside of the Employee Plans Compliance Resolution System (EPCRS).

The IRS’s VC team retains complete discretion to accept or reject these requests. If accepted, the VC team will issue a special closing agreement. It is important to note, however, that the VC team will not consider any issue relating to the form of a written 457(b) plan document. Also, governmental plan sponsors do not have to make a submission to VC to voluntarily fix problems with their 457(b) plans.

No processing for form of written 457(b) plans

According to the IRS, it has received several submissions alleging that a written 457(b) plan was not timely adopted, or amended for some tax law or income tax regulation. The VC team will not issue closing agreements for these matters and will decline to process these requests and refund any payments. The IRS reminds plan sponsors that the remedial amendment concepts and definitions in Rev Proc. 2007-44 do not apply to 457(b) retirement plans.

Plan sponsors who want the IRS to review their 457(b) plan document or consider any other document form issue may request a private letter ruling, according to the IRS, which urges plan sponsors to see Rev. Proc 2015-1 for details.

Governmental plan sponsors can self-correct

Governmental plan sponsors may self-correct their 457(b) plans if they did not comply with the Code or regulations. According to the IRS, governmental entities have until the first day of the plan year that begins more than 180 days after the IRS notifies them of the failure to correct their plan failures, under Code Sec. 457(b)(6) and Reg. §1.457-9(a). Considering the time governmental entities have to self-correct plan errors, they may not need to make voluntary submissions to the IRS in most cases, the IRS points out.

If a governmental plan sponsor needs to request additional relief or simply wants IRS approval for a correction method for a non-plan document failure, they may make a submission to VC as permitted by Rev. Proc. 2013-12. The plan sponsor must indicate that they are aware of the self-correction rule in Code Sec. 457(b)(6) and Reg. §1.457-9(a), but still wants to proceed with a written VC application. Plan sponsors should include this statement and Form 8950, Application for Voluntary Correction Program (VCP), with their submission.

Source: IRS Employee Plans News, Issue 2015-2, February 27, 2015.

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