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Business Planning

Corrective Programs and Your Retirement Plan

Setting up a qualified retirement plan always requires thought and analysis. In addition to tax deductions, business owners and executives must focus on many administrative aspects and procedures if they wish to sponsor a qualified retirement plan and keep it from becoming "defective."

Qualified retirement plans can unintentionally include defects, or they may develop defects over time. Defects may be discovered when an employee believes he or she is entitled to recover specific benefits.

Correct It Yourself

In the past, it was difficult for business executives to take appropriate corrective measures because the Internal Revenue Service (IRS) did not always clarify the necessary requirements. Today, the IRS has implemented specific, technical guidelines to make it possible—and easier—for business executives to "self-correct" defects on a voluntary basis.

By making certain that plan defects are corrected promptly and accurately, business owners and executives may avoid receiving potential, adverse actions and penalties from the IRS through the use of Corrective Programs.

There are several parts of a qualified plan that can either begin with, or develop, significant defects. Once discovered, many defects may be "self-corrected" according to the IRS Corrective Program provisions. Here are some of the defects and the appropriate measures that must be followed under the scope of the Corrective Program rules:
  • Exclusion of Eligible Employees. The business owners must make the contribution for the excluded employee with interest (for a defined benefit plan) for the employee.
  • Vesting Failures. The business owners must make a contribution equal to the forfeited amount, or reallocate amounts among all plan participants (if forfeitures are reallocated).
  • Section 415(B) Failures, Including Overpayment. The business owners must return the overpayment to the employee, while additionally providing the employee with the information that the overpayment does not qualify as a tax-free rollover. Other adjustments must be made if overpayments are created on a periodic basis. Consideration must also be taken not to reduce a spouse's survivor benefit.
  • Hardship Distributions. The business owners and executives must be certain plan participants can easily receive money when hardship conditions exist. The IRS requires what is known as the "Walk In CAP" (Closing Agreement Program) in order to correct this defect.
  • Failure to Make Minimum Contributions. This situation will require a business to fund either the top-heavy minimum allocation (in a defined contribution plan), or the minimum benefit accrual (in a defined benefit plan).
  • Failure to Make Minimum Distributions. The business owners must distribute a payment based on a formula disclosed under the Corrective Program rules (defined contribution plan) or distribute the minimum payment to retirees plus interest (defined benefit plan).
  • Failure to Obtain Spousal Consent. Plan sponsors have a choice for retirees. They must provide a qualified joint and survivor annuity, or the spouse must be informed and consent to the non-joint and survivor payout.

Correct It Promptly

While retirement plans are essential for employees, it is essential for businesses to be mindful of the regulations that make it possible for them to maintain the tax benefits of their retirement plans. Since the IRS has made it easier to "self-correct" many types of plan deficiencies, now is the time to take a closer look at whether current plans meet the requirements and guidelines prescribed by law.

Copyright © 2003 Liberty Publishing, Inc. All rights reserved.


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