If a tax-qualified retirement plan fails to satisfy all of the Internal Revenue Code’s requirements, it runs the risk of being “disqualified.” The results of disqualification are drastic. Employers lose deductions for contributions made to the plan. The earnings on plan investments are subject to taxation. Employees, who made contributions to the plan on a tax-free basis, are treated as having received taxable income.

Several years ago, the IRS established the Employee Plans Compliance resolution System (“EPCRS”) to allow correction of plan failures through various programs. If a failure is corrected through the program, the IRS will not disqualify the plan.

The IRS has now issued a revision to this correction procedure for retirement plan failures in Rev. Proc. 2006-27. The new revenue procedure expands the types of failure that can be corrected and allowable correction methods. The additional or improved correction procedures include:

• Correction of plan loan defects.
• Correction for a failure to obtain spousal consent.
• A new correction method where an employee has been excluded from participating in a 401(k) or 401(m) plan.
• Expanded ability to obtain IRS waivers of excise tax assessments.
• Reduced compliance fees for certain submissions.
• Methods of correcting certain plan document failures.

Plan loan correction has been an area where many practitioners have hoped the IRS would provide relief. It now has. In the past, if a plan loan exceeded IRS requirements as to amount or repayment terms, the employer was required to report the wrongful loan amount as a deemed distribution on a Form 1099, the employer was required to withhold taxes on the amount, and the employee was subject to income taxation for the deemed distribution from the date of the wrongful distribution. Now, if an improper loan is made, it may be corrected under the EPCRS’ Voluntary Correction Program. The correction may satisfy the Form 1099 reporting requirements and may result in no taxation to the employee.

Rev. Proc. 2006-27 is generally effective September 1, 2006. Plan sponsors are permitted, at their option, to apply the provisions of the revenue procedure on or after May 30, 2006.

You may find more information regarding the new and improved corrections procedure at www.irs.gov under the Retirement Plans Community subsection.

If you have any concerns regarding the operation or terms of your qualified retirement plan and think the EPCRS program may help you, please contact a member of this firm’s Benefits Section.