The Department of Labor (DOL) has just announced an automatic 2= month extension for filing 1999 Form 5500 for calendar year filers whose returns would normally be due by July 31, 2000. No Form 5558 need be filed. Plans with normal due dates later than July 31, 2000 do not receive the automatic extension. The DOL has launched a new website, www.efast.dol.gov, which provides information about the new Form 5500.
The Employee Plan Compliance Resolution System (EPCRS) may be used by sponsored qualified and 403(b) plans to correct qualification defects and thereby retain the plan's favorable tax status. The IRS has just released Revenue Procedure 2000-16 which consolidates all guidance issued since 1998 and clarifies certain issues.
FICA and FUTA Taxes - Qualified Plans. If a plan sponsor corrects a qualification defect in compliance with the provisions of EPCRS, the plan as corrected, will be treated as qualified for FICA and FUTA tax purposes. Accordingly, payments from and contributions to the Plan will not be subject to FICA and FUTA taxes.
FICA and FUTA Taxes - 403(b) Plans. The treatment under Revenue Procedure 2000-16 for 403(b) plans differs from qualified plans. If a 403(b) plan corrects a failure, affected participants will not be subject to taxation or withholding on account of the failure. However, Revenue Procedure 2000-16 clarifies that corrected distributions of excess monies would generally be treated as wages in the year of distribution for purposes of FICA and FUTA taxes. This rule would not apply to closed tax years.
Insignificant Failures. Two of the criteria for determining whether a failure is insignificant for purposes of voluntary correction under EPCRS involved the number of participants affected. The Revenue Procedure clarifies that the criteria involving the number of affected participants will not alone preclude a small business from being eligible for self-correction.
Waiver of Excise Taxes. The Revenue Procedure modifies the VCR, Walk-In Cap and TVC (affecting 403(b) plans) programs to permit, upon correction of minimum required distribution failures, the waiver of participants' excise taxes in appropriate circumstances.
Effective Date. The revenue procedure generally is effective on May 1, 2000. However, plan sponsors may apply the provisions of the Revenue Procedure on and after March 9, 1998 (the date of release of Revenue Procedure 98-22, which originally set forth the provisions of EPCRS).
In Revenue Ruling 98-30, the IRS first formally approved the practice of automatically enrolling participants in 401(k) plans through the use of negative elections; however, the Ruling was restricted to new plan participants. In Revenue Ruling 2000-8, the IRS has approved negative elections for current employees as well as for newly hired employees. Employers considering the implementation of negative elections should also consider the application of state law to the involuntary reduction of an employee's compensation. Many states preclude this, and while many practitioners believe that ERISA would preempt such a provision, the issue has yet to be resolved.
If a person dies with a large IRA or other retirement plan balance, such amounts are subject to both estate tax and income tax, which can combine to reduce the net amount distributable to heirs by nearly 70%. Post-death distributions from an IRA are considered "income in respect of a decedent" and are taxable to a beneficiary or heir who receives such payments. An important income tax deduction, that is often overlooked, is the deduction for estate taxes paid with respect to income in respect of a decedent. For example, if an estate pays $500,000 of estate taxes with respect to an IRA, the beneficiary or heir who inherits the IRA can claim a deduction for these estate taxes on his or her personal income tax return. If the IRA is paid out over a number of years, a proportionate part of the deduction is claimed each year a distribution is received from the IRA. Recordkeeping can get complicated if the IRA is distributed to multiple beneficiaries or heirs.
The deduction for estate tax paid on income in respect of a decedent is an itemized deduction, and thus may be reduced by up to 80% in the case of high income taxpayers. The deduction is not subject to the limitations imposed on "miscellaneous itemized deductions," however (which can only be deducted to the extent they exceed 2% of adjusted gross income). In addition, the deduction is not a preference or adjustment for purposes of the alternative minimum tax. People who miss the deduction when they first receive a distribution may amend their income tax returns, but only going back three years. Deductions older than that which are not claimed are forfeited.
Not to be outdone by the IRS, on March 14, 2000, the DOL adopted the Voluntary Fiduciary Correction Program (VFCP). To apply for the program, the applicant must submit a written narrative describing the transaction and its correction, proof of restoration of losses, a written notice to plan participants, and an executed penalty of perjury statement. Plan officials will soon be able to quickly and completely correct violations such as certain prohibited purchases, sales and exchanges, delinquent employee contributions, improper loans, improper valuation of assets and improper plan expenses. The DOL will consider any application as long as neither the plan nor the applicant is under investigation and as long as the application contains no evidence of potential criminal violations as determined by the DOL.
If the applicant complies with the conditions of the VFCP, the DOL will issue a no-action letter to the applicant, which states that the DOL will not initiate a civil investigation under Title I of ERISA regarding the applicant's responsibility for any transaction described in the no-action letter, and will not assess a civil penalty based on the violation. However, plans may still be subject to penalties imposed by other agencies, such as applicable IRS excise taxes. Additionally, the DOL reserves the right to impose a civil penalty, if applicable, based on the failure or refusal to file a timely, complete and accurate Form 5500.
The DOL is accepting comments on the program, which becomes effective April 14, 2000, which must be filed by May 15, 2000. The Department plans to implement a final version of the VFCP within 180 days of the close of the comment period.