Offering participation in the FCMM Retirement Plan is an excellent way for an employer to support employees as they work toward building a sufficient income plan for their retirement years. As one may expect, the IRS has regulations that must be followed by employers who provide this benefit. In order to maintain compliance and preserve the Plan’s tax preferred status for employees, it is imperative for an employer to understand these rules and consequently, its ongoing responsibilities. Failure to operate according to the guidelines, may result in required completion of the IRS’s Employee Plans Compliance Resolution Program (EPCRS). This article is designed to review the employer’s key responsibilities as well as provide a glimpse into the IRS correction program that must be utilized [when something goes wrong] to bring an “out of compliance” employer back into compliance.
When an employer adopts FCMM as the retirement plan for its employees, the employer also assumes several critical responsibilities - Such as updating its employer adoption agreement, notifying employees of their eligibility to participate, monitoring contribution limits, and ensuring contributions are remitted accurately and timely to the Plan.
Each of these tasks must be performed consistently and compliantly throughout an employer’s participation with the Plan to avoid what the IRS calls compliance “failures”. When failures are left uncorrected, the tax favored status of the retirement plan can be lost. Although the IRS has provisions in place to correct failures, it is always best to have established procedures to prevent errors as even the correction program can result in significant costs to the employer, as well as a considerable amount of time invested in applying required correction methods.
1. Update the Employer Adoption Agreement
The Employer Adoption Agreement (EAA) is part of an organization’s written plan document and completion is required prior to participating with FCMM. Where it is FCMM’s role to regularly review and revise the overall FCMM Plan Document to reflect changes in federal regulations and internal provisions, it is the employer’s responsibility to maintain an Adoption Agreement that mirrors how it operates in practice - in particular, eligibility to participate and how the employer will contribute on behalf of its employees. Not following the terms of the written agreement is a main contributor to operational failures among employer retirement plans.
2. Notify Employees of their Eligibility to Participate
Unless otherwise specified on the Employer Adoption Agreement, all employees scheduled to work 20 hours/week, or 1000 hours/year, are eligible to participate in the Plan. It is a best practice to provide a written notice to employees, documenting an annual notification and a possible “opt out” response. FCMM will provide employers with a sample “Annual Notice” upon request. (Employees who do not explicitly opt out should be given a participant enrollment packet with an emphasis on timely completion.) Failure to alert an employee to their eligibility to contribute to the Plan results in a deemed missed deferral opportunity, and in some cases, missed matching or employer non-elective contributions depending upon the specifics in the EAA – all of which, upon correction, come out of the employer’s pocket as a non-elective employer contribution.
3. Monitor Contribution Limits
The employer is responsible for monitoring contribution limits to ensure that contributions sent to the Plan on behalf of a participant do not total more than is legally allowed each year. The IRS establishes these limits annually. If too much is contributed to the Plan, the excess amount (adjusted for earnings) may need to be distributed to the participant as taxable income in the year of receipt.
4. Remit Contributions On-Time
The remittance of retirement plan contributions is the most frequent task an employer must perform. FCMM does not “bill” or send reminders to employers, but rather an employer must have procedures in place that ensure the timely sending of contributions to the Plan. Rules about the timing of matching contributions or other employer contributions are different from those for employee elective deferrals. Within the EAA, Employers indicate the frequency in which they have agreed to send employER contributions to the Plan. The IRS, however, has established specific timing for sending employEE salary deferral contributions to the Plan. The IRS has made it clear that employee elective deferrals must be deposited into the Plan within an administratively feasible period - generally, no later than 15 business days following the month in which these amounts would have been paid to an employee.
5. Send Detailed Remittance Instructions with Every Contribution Payment
For every contribution payment sent, FCMM must also receive detailed remittance instructions that apply to that payment. Inaccurate or missing remittance instructions always result in significant delays in funds being applied to participant accounts. Receiving proper remittance instructions dictates whether or not FCMM can invest any of the payment sent to us. Contribution amounts listed on the remittance instructions must total the payment amount. Additionally, contribution types, must match the information on file according to both the employer’s Adoption Agreement and any participant Salary Deferral Agreements.
WHEN SOMETHING GOES WRONG
Despite good intentions, sometimes an employer makes mistakes with respect to the operation of its retirement plan. When this happens, the employer may utilize one of the programs within the IRS’s Employee Plans Compliance Resolution Program (EPCRS) to correct the failure and bring the employer back into compliance. The IRS offers three different programs for employers with escalating degrees of complexity: Self-Correction Program (SCP), Voluntary Correction Program (VCP), and Audit Closing Agreement Program (Audit CAP).
Determining the Correction Program
The most common failures FCMM sees are operational errors which can be corrected by either SCP or VCP (Audit CAP is only used when an employer’s plan is under audit). The nature and extent of an employer’s error(s) dictate which of these two programs it must use. SCP is the simplest program to utilize as there are no user fees and it does not require any reporting of the failure(s) to the IRS. The main factor FCMM has seen that disqualifies an employer from using SCP is no evidence of “established practices and procedures in place to facilitate compliance with the law”. The next most common reason, often a corollary of the main factor, is multiple repeat errors not remedied before the allowed correction deadline, which is 12/31 of the second year following the year of the original failure. When an employer is not eligible to use SCP, and assuming it is not under audit, VCP must be used. Where SCP and VCP are comparable, VCP requires employers to submit to the IRS a user fee, completed IRS forms detailing mistakes, and a proposed correction process (including planned changes to procedures). If the IRS approves the correction plan under VCP, it will issue a Compliance Statement indicating it considers the employer to have moved back into compliance.
Implementing a Correction
The 120-page Revenue Procedure 2018-52 outlines EPCRS – the “comprehensive system of IRS correction programs” for employers maintaining retirement plans. It provides the framework for employers to follow, emphasizing that a correction must always take into account the following: Full restoration of benefits; reasonable and appropriate correction for the error; consistent application of correction methods for all affected; payment of all corrections as employer non-elective contributions; payment of earnings from the date of the failure.
Where the facts and circumstances related to a failure may be unique to each employer, the correction principles remain the same. The example below illustrates a scenario in which an employer is not following the terms of its Employer Adoption Agreement (EAA). We will assume, for purposes of the example, that the employer has historically demonstrated it has established practices and procedures in place.
Employer X adopted FCMM in January of 2016. On the EAA, X agreed to provide a 100% match of employee elective deferral contributions per month, up to 5%. X has one employee, the Senior Pastor (SP). The SP has a salary deferral agreement on file with his employer and FCMM, requesting a 5% deduction per pay period. His annual salary is $60,000 and X has 12 pay periods in a year. Contributions made on his behalf, which include the employer match and elective deferrals, should total $6,000 annually.
On October 1, 2018, the SP reviewed his FCMM online account and noticed there had not been any contributions made on his behalf, year to date. After consulting with FCMM and his employer, it was determined that although X was making salary deferral deductions from his paycheck, it had not sent any of the salary deferral or matching contributions to the Plan in 2018. A total of $4,500 in contributions had been missed for the SP. The identified mistake is considered an Operational Error, specifically, a “failure to follow the terms of the 403(b) written plan”.
~Fixing the Mistake~
Because X has proper procedures in place and the correction deadline has not yet past, it may use SCP to correct the failure. In order to fix the mistake, the correction method must restore the account to the position it would have been in had the failure not occurred. Consequently, X researches the interest rate for the period of missed contributions, calculates the actual missed earnings, and applies that amount to the correction. X sends FCMM two checks. The first check applies to the missed contributions for the SP, the second check applies to missed earnings on those contributions. Accompanying the checks are two remittance forms specifying the payments are for corrective contributions and earnings, respectively. In addition to remitting the necessary payments to his account, X contacts the SP in writing, alerting him to the extent of the failure and that a corrective contribution, adjusted for earnings, is being made to the Plan on his behalf. It reviews its contribution remittance procedure and revises it to include steps to ensure the mistakes do not reoccur. X documents all communication and steps it has taken related to the correction.
While employer mistakes can occur at any time, the change to an outside payroll system or a payroll staff transition is a particularly vulnerable time for errors and omissions. In the scenario above, the employer was fortunate that its employee caught the error when he did, avoiding the costlier and more stringent VCP. Sometimes employers are not that fortunate, recognizing failures years after they occurred, often requiring correction not only for current employees but also former employees that have long since separated from the organization.
Maintaining a compliant retirement plan is no small commitment. The FCMM Employer Welcome Packet, FCMM Employer Guide, and FCMM Customer Service Staff are available to help employers navigate their role. Regular review of procedures and consistent communication among those involved in the process is well worth the effort to serve staff members and to steer clear of errors and a subsequent correction.
Please Note: The information in this article is FCMM’s interpretation of EPCRS and should not be considered legal advice. FCMM recommends that employers utilize professional resources, familiar with the IRS regulations, when considering correction of operational failures.