VCP fine for not timely adopting a 401(a)(31)(B) amendment: $375
Audit CAP fine for not timely adopting a 401(a)(31)(B) amendment: $3,000
Audit fine for not timely adopting a 401(a)(31)(B) amendment: $45,000
Timely amending your plan: Priceless
Recently, it seems that the IRS auditors have been running a governmet fundraiser by imposing inordinately large fines for small missed tack-on amendments. Just today, I received a call from a fellow attorney. For the last 18 years, he has been funding a small profit sharing plan for his retirement. Like clockwork, each year he timely files his Form 5500EZ and signs the forms and amendments he received from his third party administrator. In 2005, his third party administrator died. It took him a couple of months to find a new third party administrator but he did so in time to timely file his Form 5500EZ for that year.
About a year ago, he receives a notice that his plan is under audit. He wasn’t worried. He felt he had done everything correctly. The only two participants in the plan were him and his wife, who has answered the phones, made his coffee and typed all of the paperwork at his office since he graduated from law school and passed the bar 18 years ago.
The auditor found one problem. In 2005, the IRS required all qualified plans to adopt an amendment which changed the plan document language to comply with Code section 401(a)(31)(B) and Notice 2005-5. This amendment is also known as the Automatic Rollover Amendment. The change provided that once an employee terminated employment, the employer could cash the employee out of the plan without the employees permission if the employee had an account balance of less than $1,000. If the terminated employee had a balance of more than $1,000 but less than $5,000, the employer could cash the terminated employee out of the plan without their permission by setting up an IRA and rolling their account balance into the IRA.
With Notice 2005-5, the IRS required all qualified plans to adopt an amendment for this change by the end of the plan year which began on or after January 1, 2005. For calendar year plans, this meant that the amendment had to be signed by December 31, 2005. In December of 2005, the IRS issued Notice 2005-95, which extended the deadline for adopting this amendment until the later of December 31, 2005 or the due date, including extensions, for filing the income tax return for the employer’s taxable year which included March 28, 2005. With the prior third party administrator dying in 2005, this amendment somehow was missed.
In Revenue Procedure 2008-50, the IRS issued guidance for how to bring plans back into compliance once a mandatory amendment is not timely signed. If the attorney or the new third party administrator had realized that the plan was missing the Automatic Rollover amendment from 2005, the plan could have been brought back into compliance by paying a $375 fine and filing an application with the IRS’ Voluntary Compliance Program (VCP). The VCP program can only be utilized to bring a plan back into compliance before the IRS discovers the mistake. Because this mistake was discovered by an IRS auditor, the VCP program was unavailable to bring this plan back into compliance.
If the plan had filed for a determination letter, and the missing amendment had been discovered by the IRS during the determination letter review, the IRS would have allowed this plan to pay a $3,000 fine, sign the amendment, and the plan would have been brought into compliance.
Instead, once the plan is audited and the IRS auditor discovers the missing amendment, the auditor applies a formula based upon the number of years the plan has been out of compliance and the total dollar amount in the plan. For this attorney’s plan, the IRS auditor decided that the appropriate fine is $45,000. The attorney has been given the choice of paying $45,000 or having the plan disqualified. At age 62, if the plan is disqualified, he won’t be able to start saving for retirement again.
The greater question he is pondering is how does this fine make sense because failing to sign this amendment had no impact on any participant in the plan because no employees were cashed out of the plan pursuant to Code section 401(a)(31)(B) ever, much less cashed out between 2005 and now.
[tag]pension protection act, ppa, automatic rollover, amendment, notice 2005-5, 401(a)(31)(B), IRS, fine, penalty, ERISA[/tag]