EMPLOYEE
BENEFITS
REPORT
A Newsletter from the Employee Benefits Practice Group
www.flastergreenberg.com
Editor’s Note…
This issue of the Flaster/
Greenberg Employee Benefits
Report is devoted to solving
problems. Specifically, we
discuss the programs that have
been created by the Internal
Revenue Service and U.S.
Department of Labor (“DOL”)
Allen P. Fineberg to allow plan sponsors and
fiduciaries to voluntarily correct violations of the
tax and labor laws governing the establishment,
administration and operation of retirement plans.
These programs are designed to help a plan
sponsor or fiduciary minimize the adverse conse-
quences of errors that can occur in the life of a
qualified plan. The key feature of these programs
is their voluntary nature. With limited exceptions,
they are not available if the government first
discovers the problem or defect. Using proper
follow-through and guidance, these programs
are useful to employers able to discover potential
problems on their own. The best way to accom-
plish this is to go through the process of a
“self-audit.” This process examines the plan’s
operations, compliance with IRS and DOL
reporting requirements and plan document com-
pliance with changes in the law and regulations.
In addition, even if no problems are found, the
process itself helps fulfill the employer’s basic
legal duty to ensure that a plan is being properly
administered in accordance with its terms and
applicable law, by examining the processes and
data behind the annual reports. Thus, a periodic
self-audit is a practical way to make sure service
providers are properly performing their services,
and to expose and fix problems that could lead
to significant liabilities before they are discovered
under less favorable circumstances.
Flaster/Greenberg has extensive experience
with the self-correction programs, as well as
with carrying out self-audits for plan sponsors.
Please feel free to contact us if you require
assistance in any of these areas.
Copyright © 2003
Winter/Spring 2003
Managing Liability For Plan Qualification
By Elliot D. Raff
I. Introduction
The prospect of “disqualification” of a qualified retire-
ment plan, such as a profit sharing plan or 401(k) plan, has
long raised the specter of devastating tax consequences.
Recognizing that no plan can operate in perfect compliance
all the time, the Internal Revenue Service (“IRS”) has
developed the Employee Plans Compliance Resolution
System (“EPCRS”), which allows sponsors of qualified
Elliot D. Raff retirement plans to correct almost any violation of the
qualified plan rules with certainty and fairness.
II. Disqualification: What’s the Big Deal?
If a plan fails to comply with the Internal Revenue Code’s requirements
for a qualified plan, the plan is technically “disqualified.” Disqualification
wipes out all of the tax benefits gained by having a qualified plan:
• Deductions previously taken for contributions are disallowed.
• Contributions are included in the gross income of highly compensated
employees.
• The trust holding the plan assets loses its tax exemption.
These consequences lead to additional taxes, penalties and interest being
owed. Further, disqualification can lead to personal liability for the lost benefits
under ERISA.
Disqualification by the IRS has always been a drastic measure. However, in
the absence of lesser sanctions and formal correction programs, the threat of
disqualification was always taken seriously, even with regard to accidental errors,
and, except in rare cases, practitioners could not be certain that corrections
would be acceptable to the IRS.
III. Overview of EPCRS
EPCRS, which has evolved over time, allows correction of the four broad
types of “Qualification Failures,” all of which technically disqualify a plan:
Operational Failure: A failure to operate a plan in accordance with its
terms and the Code. Examples include:
• Failing to enroll eligible employees in a 401(k) plan.
• Failing to pay required minimum distributions to certain older workers.
• Improperly allocating forfeitures.
Document Failures: Plan documents fail to conform to legal requirements.
For example, the failure to amend for legal changes.
Demographic Failure: A failure to satisfy non-discrimination and coverage
rules other than an operational failure.
Employer Eligibility Failure: The employer adopts a plan it is not eligible
to adopt. For example, an employer that already sponsors a plan adopts a
SIMPLE 401(k) plan. (continued on page 3)
Employee Benefits Report • Flaster/Greenberg P.C.
 2

Expanded Voluntary Fiduciary Compliance Program By Marc R. Garber

s any properly advised plan sponsor or fiduciary is well aware, there is • Non-exempt plan loan to a non-party-in-

A a class of transactions, referred to as “party-in-interest transactions,”

or “prohibited transactions” that is strictly prohibited by the
Employee Retirement Income Security Act of 1974 (“ERISA”). Generally,
interest at below-market rates.

Non-Exempt Purchase and Sales of Assets

a “party-in-interest” includes the plan sponsor, a trustee or other fiduciary
and certain parties related to them. Engaging in a party-in-interest transac-
tion exposes the fiduciaries to personal liability for losses and civil penalties
under ERISA and further, exposes the party-in-interest to excise taxes
under the Internal Revenue Code. This is the case even if the transaction
results in a tremendous gain for the plan. Party-in-interest transactions are
prohibited based solely on the potential for abuse. Thus, even a transaction
negotiated at arm’s length and for fair market value will be prohibited if it
is a party-in-interest transaction involving plan assets not covered by a
statutory or class exemption. If a plan fiduciary is contemplating using plan
assets in a transaction with a party-in-interest for which no general exemp-
tion exists, it could apply to the U.S. Department of Labor (“DOL”) for a
private exemption, but obtaining an exemption is costly and takes time.
Until recently, upon learning that such a transaction was not allowed,
sponsors and fiduciaries often had difficulty undoing these transactions –
reversing a party-in-interest transaction usually constitutes a new improper
transaction which also requires administrative relief from the DOL. Further,
short of obtaining such an individual prohibited transaction exemption
regarding the “fix” (also costly and time-consuming process), there was no
way to be certain that the DOL would accept the correction and no way to
obtain relief from the penalties and excise taxes.
A few years ago, the DOL launched its Voluntary Fiduciary Compliance and agreeing not to take any enforcement action
Program (“VFC Program”). As originally designed, the VFC Program
offered no relief from IRS excise taxes or
DOL civil penalties. Now, the DOL has
expanded the VFC Program to allow the
uniform correction of a broader range of …the DOL expects the
violations that may be fixed with DOL VFC Program to encourage
approval. More recently, a joint
DOL/IRS exemption formally granted voluntary correction of the
relief from certain IRS excise taxes in
connection with a submission under the
specified ERISA violations.
VFC Program. Clearly, the DOL expects
the VFC Program to encourage voluntary
correction of the specified ERISA violations. As such, plan sponsors and
fiduciaries are advised to review plan operations and correct such errors as
may be found, because this relief is not available if the plan is under audit. amounts after properly valuing plan assets.
The following violations can now be corrected under the VFC Program
and qualify for relief from both ERISA civil penalties and IRS excise taxes: trouble of a VFC Program submission, it should
Contribution Violations
• Failure of an employer to remit participant contributions to a retire-
ment plan trustee or custodian on a timely basis.
• An employer’s failure to forward participant contributions to an
insured welfare plan or a funded welfare plan trust within the time lim- Although this notice puts all participants on
its of the Plan or, if shorter, under DOL rules.
Participant Loan Violations
• Non-exempt plan loan to a party-in-interest at fair market rates.
• Non-exempt plan loan at below market rates to a party-in-interest.
• Purchase of an asset by a plan trustee from a
party-in-interest.
• Sale of a plan asset by a trustee to a party-in-
interest.
• A plan’s purchase of an asset from a non-party-
in-interest for more than fair market value.
• A plan’s sale of an asset to a non-party-in-
interest for less than fair market value.
Benefits
• Payment of benefits without properly valuing
the assets of the plan.
Plan Expenses
• Payment of duplicative, excessive or unneces-
sary compensation by a plan.
• Payment of dual compensation to a plan
fiduciary.
A successful submission under the VFC
Program will result in the DOL issuing a “No
Action Letter,” in effect, approving the correction
with respect to the identified and corrected
violations. In order to participate in the
VFC Program, a formal written submis-
sion explaining the violations, their cause
and their correction is required. Further,
the violations must be corrected at the
time of the submission and the correction
must be in accordance with DOL
guidelines, including the requirements
regarding the calculation of lost earnings
or interest. Generally, however, the
permitted corrections are fairly simple,
for example, depositing withheld contributions
plus interest, or recalculating benefit payment
If a sponsor or fiduciary is going to the
take advantage of the excise tax and civil penalty
relief. To do so, the taxpayer must also provide
written notice of the VFC Program submission
to all plan participants, who have a right to
submit written comments to the DOL.
notice of the prohibited transaction and increases
the possibility of a private claim by participants,
the risk of participant action is probably minimal
(especially since the violations have already been
corrected), so the relief from the excise taxes and
(continued on page 3)

Employee Benefits Report • Flaster/Greenberg P.C.

 3

Managing Liability For Plan Qualification (continued from page 1)

Qualification Failures are corrected under the following programs: response to the John Doe VCP,
Self-Correction Program (“SCP”): Allows correction without paying any fee or disclosed the client’s identity, and
sanction. combined the two applications for
resolution.
Voluntary Correction Program (“VCP”): Allows correction any time before
audit with payment of a limited fee and formal IRS approval. V. Conclusion
Audit CAP: Permits corrections in the context of an audit with payment of a EPCRS can be an invaluable tool for
sanction and IRS approval. correcting problems that will almost
inevitably occur, given the incredible
Several recent developments make VCP more user-friendly.
complexity of the plan qualification
• Fixed Sanction Ranges and Presumptive Sanction Amounts: Gives certain- requirements. In order to maximize the
ty as to cost. potential benefits of this program,
• John Doe VCP: Allows anonymous submissions. employers would be well-advised to
• VCO and VCS: Simplified procedures where only operational failures are pres- undertake a self-audit of their plans. A
ent and corrected using standard correction methods. self-audit, to varying degrees, attempts
to simulate an audit by the IRS to find
• Retroactive Plan Amendments: In some cases, errors may be corrected by out if there are any qualification prob-
conforming a plan document to operations, generally avoiding the cost of cor- lems, although the scope and depth
rection (although a sanction will still be owed). may vary. Discovered problems can then
• Excise Tax Relief: The IRS will also give relief from certain excise taxes, such be fixed under SCP or VCP, which will
as the 50% excise tax for failing to give “70 1/2” distributions. be far less costly than correcting the
• Standard Corrections and Calculation Methodologies: Now, “standard problem under Audit CAP. In addition
corrections” will automatically be approved under VCP (previously, standard cor- to protecting the tax benefits of a quali-
rections existed only under the non-submission self-correction program). Further, fied plan, this helps ensure proper plan
EPCRS now provides detailed guidance on how a wide variety of calculations, for administration and avoids potential
example, of lost earnings, should be performed. ERISA liability as well.
A few additional points are worth noting:
• IRS approval only extends to the errors IRS approval only
disclosed and corrected. extends to the errors Expanded VFC Program
• Errors must be corrected for all years in (continued from page 2)
which they occurred, including “closed” years disclosed and corrected.
that could not be audited. civil penalties probably justifies the risk
of notification. Of course, the employer
• Earnings or interest must be restored. may also need to address employee rela-
• EPCRS is not available to correct prohibited transactions. tions issues arising from this disclosure.
Despite these concerns, the new VFC
IV. Examples
Program offers an improved tool that
The following are based on actual client matters we have handled:
plan sponsors and fiduciaries can use to
1. 401(k) plan accidentally failed to give enrollment forms to certain manage their exposure to potential
employees. Corrected under SCP by making a contribution, with interest, on ERISA liability. Given the expansion of
behalf of the excluded employees. the scope of the violations covered by
2. Distributions made without spousal consent. Corrected by obtaining consent the VFC Program and the ability to
to the distributions. obtain relief from excise taxes and civil
penalties, sponsors and fiduciaries should
3. Failure to make required “70 1/2” distributions. Corrected by paying the actively consider a self-audit to determine
missed distributions. Relief from the excise tax (50% of the missed payment) whether they are in compliance with
charged to the employee obtained in VCP. these ERISA provisions.
4. Combining programs under EPCRS. EPCRS also can be strategically used.
A new actuarial firm discovered a variety of operational errors as well as the
failure to amend the plan to comply with the Tax Reform Act of 1986. This report is for general use and infor-
mation, and the content should not be
Investigation showed some errors stretching back 10 years. Errors regarding interpreted as rendering legal advice on
allocations, forfeitures and the document failure were submitted under VCP. any matter. Specific situations may raise
The plan sponsor was unwilling to pay for other corrections and wanted to additional or different issues and such
obtain approval of retroactive plan amendments. We submitted these under information should be coordinated with
professional legal advice.
John Doe VCP. On the strength of our submission, we obtained a positive

www.flastergreenberg.com
 PRSRT STD
U.S. POSTAGE
PAID
Bellmawr, NJ
Permit No. 58

1810 Chapel Avenue West

Cherry Hill, NJ 08002-4609

Return Service Requested

Office Locations 300 Walnut Street

Philadelphia, PA 19106
(215) 922-4000
216 North Avenue
Cranford, NJ 07016
(908) 245-8021
Commerce Center
1810 Chapel Avenue West 190 S. Main Road 2900 Fire Road, Suite 102A
Cherry Hill, NJ 08002-4609 Vineland, NJ 08360 Egg Harbor Township, NJ 08234
(856) 661-1900 (856) 691-6200 (609) 645-1881

Employee Benefits Practice Group Employee Benefits

Jeffrey A. Cohen Stephen M. Greenberg
(856) 382-2240
Jeff.Cohen@flastergreenberg.com
(856) 661-2261
Steve.Greenberg@flastergreenberg.com
Practice Group Services
Allen P. Fineberg J. Philip Kirchner ◆ Design, implementation and admin-
(856) 661-2264 (856) 661-2268 istration of qualified retirement plans
Allen.Fineberg@flastergreenberg.com Phil.Kirchner@flastergreenberg.com
Richard J. Flaster Elliot D. Raff ◆ Fiduciary counseling
(856) 661-2260 (856) 382-2241 ◆ ERISA and other employee benefits
Rick.Flaster@flastergreenberg.com Elliot.Raff@flastergreenberg.com
litigation
Marc R. Garber (Of Counsel) Paul J. Russoniello
(856) 382-2237 (856) 661-2270 ◆ Employee Stock Ownership Plans
Marc.Garber@flastergreenberg.com Paul.Russoniello@flastergreenberg.com (ESOP)
◆ Executive compensation
◆ Stock options, phantom stock and
Practice Areas other incentive stock programs
Bankruptcy • Business and Corporate Services • Commercial Litigation • Commercial Real Estate ◆ Cafeteria plans and other welfare
• Construction Law • Employee Benefits • Employment and Labor Law • Environmental Law benefits programs
• Estate Planning and Administration • Family Law and Adoption • Financial Work-Outs • ◆ Deferred compensation programs
Health Care • Land Use • Pension and Retirement Plans • Privately-Held and Family-Owned
Businesses • Securities Regulation • Taxation • Technology and Emerging Businesses ◆ IRS and DOL audits and compliance