Subject: Newsletter: New IRS Rules for Operational Defects Date: Fri, 17 Jan 1997 16:05:17 -0500 ................. BenefitsLink Newsletter ............. { { Free, useful information about U.S. tax and labor laws { and new Internet resources, for employee benefit plan { sponsors, service-providers and participants. ......................................................... ___________________________________________________________ This issue's sponsor: CLEARVIEW CONSULTING Look to Clearview to provide you and your participants with the most innovative and cost-effective software products, both for Windows and the Internet! Come see us on the Web at http://www.cv-c.com __________________________________________________________ NEW IRS RULES ENABLE MORE PLANS TO AVOID DISQUALIFICATION The IRS has issued an important new "administrative policy" affecting qualified retirement and tax-deferred annuity programs. Issued on January 7, 1997 by the National Office, the new policy allows employers to "self-correct" errors that arise in the operation of such programs. The policy replaces the 1991 "Administrative Procedures Regarding Sanctions" with a set of more liberal rules called the "Administrative Policy Regarding Self-Correction" (or "APRSC"). APRSC is effective immediately, meaning the new rules are now to be applied by IRS district offices when auditing qualified retirement (section 401) or tax-deferred annuity (sections 403(a) or 403(b)) programs. They have immediate significance to all sponsors of such programs, however, because the new rules provide a roadmap of steps to take now in avoiding potential loss of tax benefits if the program is selected for an IRS audit. In brief, a qualified retirement plan will not be disqualified on audit or a tax-deferred annuity program will not result in loss of the exclusion allowance for employees despite one or more errors in operating such a plan or program if: (1) the plan year involved is not under audit, (2) the defect arises solely from the failure to follow plan terms (rather than a shift in demographics of the workforce that would require a plan amendment for correction), (3) the defect is not an "exclusive benefit" violation relating to the "misuse or diversion of plan assets" (in which case the Department of Labor also might have jurisdiction), (4) the sponsor or administrator has "established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance" with the tax code's requirements, (5) those procedures were followed but through an oversight or mistake in applying them or due to an inadequacy in the procedures an operational violation occurred, (6) the sponsor makes "full correction of all violations for all years for which the defects exist," putting the participants and the plan in the position they would have been in if the defect had not occurred, (7) the correction occurs before the end of the plan year following the plan year in which the operational violation occurred, (8) in the case of a qualified retirement plan, the plan has a favorable determination letter (if individually-designed or a volume submitter plan), is an adopter of a master or prototype plan that has a current IRS National Office opinion letter, or is a regional prototype plan that has a current key district office notification letter, and (9) in the case of a 403(b) tax-deferred annuity program, the defect is one that would cause loss of the exclusion allowance under tax code section 403(b) (not a violation involving contributions in excess of the section 415 limit or the maximum exclusion allowance, which result "solely in the inclusion in income for affected participants"). Even if the operational violation is not self-corrected in accordance with the above rules, a defect might be "insignificant" under all the facts and circumstances, as described in another section of the new rules. The full text of the new rules can be found on BenefitsLink (tm), the national employee benefits Web site, on this Web page: http://www.benefitslink.com/IRS/APRSC.html (Note: capitalize the characters exactly as shown above.) Discussion of the new rules also is taking place on the Retirement Plans "message board" on BenefitsLink, available through the BenefitsLink home page at http://www.benefitslink.com ................. BenefitsLink Newsletter ............... { { To unsubscribe: send email to majordomo@benefitslink.com { with "UNSUBSCRIBE newsletter" in the text of the email { without the quotation marks. { { To subscribe: send email to majordomo@benefitslink.com { with "SUBSCRIBE newsletter johndoe@wherever.com" in the { text of the email without the quotation marks, using { your email address rather than johndoe's. { { Your email address is not sold or leased to junk mailers { or any other organization ... no spam, just BenefitsLink! { { To contribute information for publication or to learn { more about sponsoring an issue of the newsletter, please { reply to newsletter@benefitslink.com. { { BenefitsLink is the national employee benefits Web site { at http://www.benefitslink.com -- Dave Baker, Editor.