IRS Makes it Easier to Resolve Plan Loan Problems

By NAPA Net Staff • 4/1/2015 • 0 Comments

The Internal Revenue Service is moving to make it easier – and in some cases cheaper – to remedy plan problems with participant loans.

In Revenue Procedure 2015-27, the IRS said it is reducing voluntary correction program (VCP) compliance fees relating to failures to meet requirements with respect to participant loans. The IRS also clarified that, for certain overpayments, a plan may use correction methods other than the correction methods set forth in sections 6.06(3) and 6.06(4) of Rev. Proc. 2013-12.

According to the IRS, some plans may be interpreting the correction rules as requiring a demand for recoupment from plan participants and beneficiaries in all cases. However, depending on the facts and circumstances, this may not be the case.

Under correction rules, the employer is directed to have taken reasonable steps to have the overpayment returned to the plan. The IRS said it has learned that some plans have demanded recoupment of large amounts from plan participants and beneficiaries on account of plan administration errors made over lengthy periods of time, and that plan participants and beneficiaries, particularly those who are older individuals, may have financial difficulty meeting some corrective actions that have been sought by plan administrators, including the return of overpayments with substantial accumulated interest.

The IRS explains that, depending on the nature of the overpayment failure (such as an overpayment failure resulting from a benefit calculation error), an appropriate correction may include having the employer contribute the amount of the overpayment (with appropriate interest) to the plan in lieu of seeking recoupment from plan participants and beneficiaries. The IRS also cited as an example of an appropriate correction method a plan sponsor adopting a retroactive amendment to conform the plan document to the plan’s operations.

In the Revenue Procedure the IRS also requests comments about recoupment of overpayments.

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