Practitioners have long recognized that EPCRS (Rev. Proc. 2008-50) provides several mechanisms to repair qualification defects. But EPCRS also provides mechanisms to abate various excise taxes in appropriate situations. Specifically, through EPCRS, it is possible to reduce or eliminate the following excise taxes:

• The 50% penalty tax for failure to make required minimum distributions (Code §4974);
• The 10% penalty tax for making a nondeductible contribution, if the contribution is part of an EPCRS correction (Code §4972);
The 10% penalty for late distribution of excess contributions or excess aggregate contributions from a failed ADP or ACP test (Code §4979); or
• The 6% penalty for excess IRA contributions resulting from an overpayment returned to the plan or an Excess Amount withdrawn by the participant.

This relief is never available under self-correction. The plan administrator must file under VCP and must specifically request the excise tax relief. While relief from the 50% penalty is available under Audit CAP, that is not true for the other penalties.

Example: Plan A made an accidental mistake in computing the ADP test. When the plan ran the test initially for the 2009 calendar plan year, the plan distributed $9,000 of excess deferrals to the HCE participants to correct an ADP failure before March 15, 2010. In 2011, the plan discovers that the amount distributed should have been $13,000. The plan determines that it will correct using the “1:1 correction" approach. Therefore, the plan must make an additional corrective distribution of $4,500 (including $500 of earnings) to the HCEs and contribute $4,500 as a QNEC for the NHCEs. If the plan self-corrects the failure, the employer is subject to the 10% penalty tax for late ADP corrections. If the plan corrects under VCP, and requests that the IRS abate the penalty, in appropriate cases the service will do so. While the tax savings are likely insufficient to warrant a VCP filing in and of themselves, if the plan is going to file under VCP anyway (perhaps because of a non-amender failure), it makes sense for the plan to request the excise tax savings.

Example: Plan B failed to distribute a required minimum distribution of $30,000 to a participant in 2010. While the plan can self-correct by making the distribution in 2011, the participant is potentially liable for a $15,000 penalty. Alternatively, the plan can file under VCP and request forgiveness of the penalty. If this is the only reason the plan is filing, the filing fee is $500, regardless of the size of the plan, and the plan can file a streamlined VCP application using Appendix F, Schedule 8. Using Schedule 8, the plan must explain its request for relief only if the participant owns at least 10% of the business.

Comment: In a conversation with an IRS official, they informed us that they have always waived the 50% excise tax.

Form 5500/EFAST2 Workshop, April – June
If I attended last year, will I benefit from attending this year? The answer is an affirmative “yes." Now that the DOL and IRS have immediate access to the information, it is even more important to complete the 5500 accurately and timely. The DOL and IRS are using the readily available information to focus immediate attention on certain issues, such as eligibility to file Form 5500-SF, missing audit reports, and 403(b) plan compliance. In addition, we will tell you some of the most common (and hard to spot) filing mistakes that trigger error notices and how to avoid them, so you can minimize amended returns. The program will provide a line-by-line review of Form 5500 and schedules, with emphasis on Schedule C, and will explain how the new service provider fee disclosure regulations will affect Schedule C, as well as the filing requirements for the revised Form 8955-SSA… Visit our Web site for details and to register online.

401(k) Plan Current Issues Workshop, April – June
This year’s 401(k) Plan Workshop is packed with information, examples, and answers you need to know to deal effectively and efficiently with 401(k) and other qualified plans. We will show you how the new participant and service provider fee disclosure rules work in different investment environments. We will also discuss in-plan Roth rollover rules, and will provide fresh analysis on some of the thorniest plan administration issues, including participant loan errors, and rehired employees. The Workshop also will explain and analyze IRS unofficial positions on practical 401(k) plan issues, so you can be prepared for audits. As always, the programs will use case studies to provide practical understanding to these complicated rules. Register for the Workshop on our Visit our Web site for details and to register online.