In August of 2019, the IRS issued Revenue Ruling 2019-19 (“Guidance”) which provided guidance regarding the tax treatment of certain types of uncashed checks issued from a tax-qualified retirement plan.  The facts presented within the Guidance involved an individual who received a check representing a taxable distribution from a tax-qualified plan and, while able to cash it in 2019, chose not to do so.  The best example of such a situation would appear to be an individual who receives a required minimum distribution (“RMD”) in December of 2019 but then chooses to hold the check and not cash it until January of 2020.  The Guidance then presents and answers three separate tax questions about such circumstances.

The first question posed within the Guidance is when the uncashed check should be declared as gross income by the recipient.  In this regard, the IRS indicates that the distribution is taxable to the participant in 2019 because it was actually distributed in 2019 and could have been cashed by the recipient in 2019.  The IRS states in a footnote that it is irrelevant whether the individual keeps the check, sends it back, destroys it or cashes it in a subsequent year.  The amount would still constitute gross income for 2019.

The second question posed within the Guidance considers whether the failure to cash the check in 2019 would impact the plan administrator’s withholding obligation in relation to the distributed amount.  Unsurprisingly, the IRS states that the recipient’s failure to cash the check does not affect the timing of the plan administrator’s withholding obligation or the plan administrator’s liability for the payment of the tax.

The final question discussed within the Guidance is whether the failure to timely cash the check alters the reporting obligation with regard to such amount.  Again, as to be expected, the Guidance indicates that as long as the amount to be reported exceeds the reporting threshold (a meager $10), the recipient’s failure to cash the distribution check does not impact the obligation to report such amount on a 2019 Form 1099-R.

While the specific issues raised and answered within the Guidance are welcome, it is questionable why the IRS thought it was currently necessary to formally address them.  This is because the issues considered within the Guidance are examples of relatively well settled points that the IRS has routinely espoused in other contexts and likely were already assumed to be the position of the IRS on these issues by the vast majority of retirement plan practitioners.  Notwithstanding, the IRS does include a statement at the end of the Guidance that suggests a broader examination of these issues may be provided in the future.

More specifically, at the end of the Guidance, the IRS states that it is continuing to “analyze issues that arise in other situations involving uncashed checks from…retirement plans…including situations involving missing individuals with benefits under those plans.”  The fact that the Guidance is limited to a scenario where the individual actually receives the check is surely quite important to the conclusions drawn therein.  Presumably a different result might be warranted if the plan administrator does not possess a current address for the intended recipient and, as a result, cannot successfully issue a distribution check into the possession of such individual.   Hopefully, the IRS will take the opportunity in the near future to provide additional guidance on this topic with regard to “missing participants” due to the lack of certainty that surrounds that aspect of this issue.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

In April of 2019, the Internal Revenue Service (“IRS”) issued an update to the program allowing employers to voluntarily correct certain retirement plan tax-qualification failures.  This program, known as the “Employee Plan Compliance Resolution System” (“EPCRS”), includes rules and guidelines for situations where a retirement plan sponsor must formally submit the failures to the IRS under the “Voluntary Correction with Service Approval” (“VCP”) portion of EPCRS as well as situations where a plan sponsor can independently implement correction of the failure itself under the “Self-Correction Program” (“SCP”) segment of EPCRS without direct IRS oversight.  In a welcome move, this most recent update to EPCRS has expanded certain situations where a retirement plan sponsor can independently correct a tax-qualification failure under SCP.  The remainder of this article is dedicated to exploring some of the new scenarios where a plan sponsor is permitted to “self-correct” tax-qualification defects.

Notwithstanding the expanded role of SCP considered within this article, it is important to remember that the correction of any retirement plan tax-qualification failure is a technical and complicated process which must be performed in specific compliance with many detailed rules and requirements.  Thus, despite the “do-it-yourself” message suggested by the name of the “Self-Correction Program”, we strongly recommend that all VCP and SCP correction efforts only be performed under the guidance of a qualified retirement plan service provider which usually requires the retention of a competent ERISA attorney.

Participant Loan Failures

Prior to the recent update to EPCRS, SCP was extremely restrictive with respect to the correction of participant loan failures.  Under prior guidance, correction of participant loan failures essentially was not allowed under SCP.  However, the 2019 EPCRS update now allows certain loan failures to be corrected under SCP which means that, in some circumstances, a loan default can now be avoided by utilizing SCP.

In this regard, EPCRS now allows the self-correction of participant loan failures in circumstances where: 1) loan repayments are not made timely causing the loan to go into default; 2) a participant’s spouse does not provide written consent for the loan (if necessary); and 3) a participant receives more plan loans than permitted under the terms of the plan (ex. plan provides for only one loan per participant but participant is allowed to obtain two loans from the plan).

Despite this expansion to the correction of loan failures under SCP, certain loan failures remain correctable only under VCP.  More specifically the following loan failures all require a formal submission to the IRS under VCP: 1) loans that exceed the statutory maximum loan amount; 2) loans that exceed the statutory maximum loan repayment term; and 3) loans that violate the level amortization requirement.

It is interesting to note that a participant loan failure triggers a tax-qualification defect under the Internal Revenue Code (“IRC”) that is subject to enforcement by the IRS while also triggering violations under the Employee Retirement Income Security Act (“ERISA”) that are subject to enforcement by the Department of Labor (“DOL”).  Prior to the new guidance, the DOL indicated that it would accept correction of loan failures under VCP as full correction for ERISA purposes.  However, that DOL guidance was promulgated at a time that the IRS essentially did not allow for correction of loan failures outside of VCP.  Thus, now that the IRS is allowing the self-correction of certain loan failures that previously required correction under VCP, a conflict has been created.

As plan sponsors take advantage of the new opportunity to self-correct loan failures under SCP, such failures will be resolved for IRS IRC purposes but not DOL ERISA purposes since the DOL does not recognize the self-correction of loan failures under SCP as full correction for ERISA purposes,.  Thus, unless or until the DOL updates its guidance on this matter, self-correction of loan failures under SCP will not alleviate a plan sponsor’s potential liability under ERISA for such failure.  Hopefully, the DOL will take steps in the near future to align its prior guidance with this new development in order to remedy this concern.

Retroactive Plan Amendments to Resolve Certain Operational and Document Failures

In addition to prior versions of EPCRS being extremely restrictive with respect to the correction of participant loan failures under SCP, retroactive amendments were not routinely permitted under SCP.  In the past, retroactive plan amendments were permitted under SCP but generally only in the context of the early inclusion of not yet eligible employees and with regard to the granting of loans and/or hardship distributions when the plan did not explicitly allow for them.

The 2019 EPCRS update has now expanded the situations under which a retirement plan sponsor can resolve operational defects through retroactive plan amendments.  This should prove valuable in situations where the terms of a plan were more restrictive than its operation. Under the new guidance, a retirement plan is eligible to self-correct via retroactive amendment to conform the terms of the plan to its operation if the amendment: 1) results in an increase in a benefit, right or feature provided under such plan; 2) is available to all eligible employees; and 3) otherwise complies with the Code and the correction principles of the EPCRS.  Although extremely fact dependent, it is expected that most SCP corrections of this type will need to be completed within approximately two plan years of its occurrence.

Self-correction is also now available to correct certain plan document failures such as a failure to execute a required plan amendment or a restatement if the failure is corrected within approximately two plan years of its occurrence and such failure did not involve the execution of the initial plan document.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

Many employers are unaware that, in certain circumstances, they may be eligible for a valuable tax credit in connection with their establishment of a retirement plan.   Although this particular tax credit has been available for over a decade, it is still surprising to see the general lack of awareness that most plan sponsors have regarding this tax saving opportunity.  As a result, this article is intended to familiarize readers with this tax credit so that they can attempt to evaluate its application to their (or their client’s) tax situation.

Effective for tax years beginning on or after January 1, 2002, the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”)[1] created a tax credit for “small employers” who establish a new “eligible employer plan”.  The credit is equal to up to 50 percent of the “qualified plan start-up costs” incurred for a period of up to three years.  In addition, a $500 maximum limit applies in relation to the credit for each of the three years that the credit may be claimed.  An employer may elect to initially apply the credit to the year the permissible plan is established or to the year before establishment.  Also, the employer may not deduct any start-up costs if it claims the credit.  For those readers who possess a greater familiarity with the Internal Revenue Code of 1986, as amended (“Code”), and the tax credits available thereunder to businesses, this credit is allowed in connection with the general business credit permitted under section 38(b).

As you can see, there are several very important “defined terms” included within the authorizing language for the credit that are critical to determining its availability to any particular plan sponsor.  First of all, only a “small employer” is eligible to claim this tax credit.  In this context, a small employer is defined in the same manner as it is used in conjunction with SIMPLE plans.  Thus, in general, a small employer for purposes of this tax credit is an employer with 100 or fewer employees who received at least $5,000 of compensation from such employer for the preceding year.

Another important consideration is that the credit is only available with respect to the establishment of an “eligible employer plan”.  In general, an eligible employer plan is a tax-qualified plan under section 401(a) of the Code (such as a profit sharing plan, 401(k) plan and/or defined benefit plan, among others), Simplified Employee Pension Plan (“SEP”) or Savings Incentive Match Plan for Employees (“SIMPLE”).  In addition, in order to qualify for the credit, the newly established plan must have at least one participating non-highly compensated employee.  This final “eligible plan” qualification is of great importance because it effectively eliminates the credit with regard to “solo(k)” plans.

Finally, the credit may only be applied in connection with “qualified plan start-up costs”.  For this purpose, qualified plan start-up costs are any ordinary or necessary expenses incurred with regard to the establishment of such plan, its administration or certain costs incurred related to employee investment education expenses.

Obviously, everyone’s tax situation is different so, as much as we hope this article helped you to better understand this topic, it is not to be construed as financial, tax or legal advice.  Therefore, if you believe that it may apply to your (or your client’s) company, be sure to further discuss it with a qualified accountant or tax professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.