1. Nonqualified Plan Self-Audit Techniques and Correction Programs
Susan S. Risinger, Smith & Downey, P.A.
Qualified Plan Self-Audit Techniques and Correction Programs
Barry K. Downey, Smith & Downey, P.A.

2. Nonqualified Plan Self-Audit Techniques and Correction Programs
Susan S. Risinger, Smith & Downey, P.A.

3. Overview Section 409A is the main concern
Section 409A applies to “deferred compensation”
Scope of deferred compensation is very broad
Potentially applies to any arrangement that promises compensation that will be paid in a future year
Potentially includes arrangements provided by tax-exempt entities—Not discussed today

4. Exemptions from 409A Qualified Plans
Certain stock rights (options/stock appreciation rights)
Certain severance pay
Short-Term Deferrals

5. Section 409A issues can arise in:
Traditional “top hat” plans—SERPS, Executive Deferred Compensation, etc.
Employment agreements
Severance agreements
Short and long-term incentive plans
Some equity arrangements and phantom equity arrangements
Change in Control Agreements
Retention Agreements
Casual letter agreements or promises over ...

6. 409A Requirements (very generally)
Deferral/Payment Date elections must be made timely
Deferred Comp may/must be paid only upon permissible payment triggers
Specified date
Death
“Disability”
“Unforeseeable Emergency”
“Change in Control”
“Separation from Service” (with a 6-month wait for “key employees”)

7. If an arrangement violates Section 409A (in form or operation):
Participant, not the Company, is subject to:
Immediate income tax to the extent vested
20% penalty tax plus an interest penalty tax
Company is subject to:
Potential reporting/withholding failures
Practically speaking: Indemnification of employee

8. Self Audit Technique
Collect EVERY arrangement that potentially provides deferred compensation
Confirm whether the arrangement is exempt from 409A or subject to 409A
If subject to 409A, confirm the Plan’s terms comply with 409A
If subject to 409A, confirm operation of the plan complies with 409A and the Plan’s terms
If you find errors, consider whether correction is possible

9. 409A Self-Correction Programs
May self-correct operational or document problems while unvested
No need to pay penalties or notify IRS
May clarify “ambiguous” terms (as described under the IRS Correction Program)
If vested, and a clear 409A failure, determine whether IRS amnesty program is available
Operational errors (Notices , & )
Document errors (Notices & )

10. Operational errors – General Requirements
(1) the employer takes "commercially reasonable" steps to avoid a recurrence of the failure; (2) the employee is not "under IRS examination" for the year during which the failure occurred; (3) the failure is "inadvertent and unintentional" and is not related to any IRS "listed transaction"; (4) with respect to erroneous payments to the employee, the employer is not experiencing a substantial financial downturn; (5) most corrections require a one-page notice be attached to both the employee's and employer's next tax return; and (6) Correction available no later than end of second calendar year following calendar year of failure (some failures have earlier deadline depending on amount involved and whether participant is an "insider").

11. Operational Errors Eligible for Correction
1. Under-Deferrals/Early Payments 2. Excess Deferrals/Late Payments

12. Plan Document Errors – General Requirements
(1) the employer takes "commercially reasonable" steps to identify and correct all other 409A plans that have similar document failures;
(2) neither the employer or the employee is "under IRS examination" with respect to nonqualified deferred compensation for any taxable year in which the document failure existed;
(3) the failure is "inadvertent and unintentional" and is not related to any IRS "listed transaction";
(4) the employee includes any deferred amount in income under 409A as may be required under the correction program, and
(5) most corrections require a one-page notice be attached to both the employee's and employer's tax return.

13. Plan Document Errors Eligible for Correction
1. Impermissible Definitions of Otherwise Permissible Payment Events (e.g., impermissible definition of Separation from Service, Change in Control, or Disability). 2. Payment Period Longer than 90 Days Following Permissible Payment Event. 3. Payment Period Following a Permissible Payment Event being Dependent Upon Employee Completing Certain Employment-Related Actions. 4. Plan has Permissible and Impermissible Payment Events. 5. Plan has Impermissible Payment Events Only. 6. Certain Impermissible Alternative Payment Schedules. 7. Impermissible Employee or Employer Discretion with Respect to a Payment Schedule (Including Improper Subsequent Deferral Elections). 8. Impermissible Employer Discretion to Accelerate Payment Events. 9. Impermissible Reimbursement or In-Kind Benefit Provisions. 10. Failure to Include Six-Month Delay of Payment for Specified Employees. 11. Provisions Providing for Impermissible Initial Deferral Elections (but not to Impermissible Initial Elections Regarding the Form and Timing of Payment).

14. DOL Issue – Top Hat Registration
"Top hat pension plans" may file a one-time registration statement when the Plan is first adopted in lieu of annual Form 5500s.
If this requirement is not met, plan administrator may use the DOL's Delinquent Filer Voluntary Compliance Program (DFVCP) to file a late top hat registration statement for a small fee ($750).

15. Qualified Plan Self-Audit Techniques and Correction Programs
Barry K. Downey, Smith & Downey, P.A.

16. Things to avoid (in order of increasing cost/liabilities)
IRS Audit
DOL Audit
Litigation

17. Get in Compliance and Stay in Compliance
Plan document
Summary Plan Description
Administrative Forms and Policies
Self Audits (Annual for some issues)
Plan updates and Summary of Material Modifications
End of IRS Five-Year Approval Process
Replaced with Prior (and Better) Process
Makes Individually Designed Plan More Cost Effective and Efficient

18. How to Respond to a Notice from IRS/DOL/Litigation
File Power of Attorney First
Respond to Request for Plan Documents/Information within 30 days
Respond to IRS/DOL by Date in Notice or Request More Time
Don’t Ignore

19. Top IRS Issues Definition of Compensation Updating plan documents
Employee eligibility
Plan loans
In-service distributions
Distribution process/paperwork
Suspension of benefits
Nondiscrimination testing
Vesting
Minimum required distributions
QDRO procedures

20. Top DOL Issues Target date funds Revenue sharing Float
Investment management
Late contributions (“as soon as they can be reasonably segregated” from the employer’s general assets) (fewer than 100 participants “7 business days safe harbor”; larger pans 2-3 business days standard)
ERISA fidelity bonds
Blackout period notices
Investment policy/guidelines
Plan committee meetings
Changing recordkeepers

21. Top Litigation Issues (DOL and participant lawsuits)
Breach of Fiduciary Duties
Failing to have best possible plan investments
Failing to have best possible vendor fees
Failing to have best possible vendor service quality

22. Best Practices to Avoid/Win Litigation
Regularly/Vigorously Benchmark Administrative and Investment Fees
Select Service Providers Professionally and Prudently
Keep Extensive and Permanent Files Memorializing Everything
Use these same practices to select and monitor investment options, and for 404(c), QDIA and Fee Disclosure compliance

23. Protections for Decision Makers
Review all vendor agreements and plan documents to ensure no personal liability
Ensure appropriate and adequate insurance and indemnification are in place
Ensure decision makers are following written procedures/guidelines
Provide continuing education for decision makers

24. Correction Programs IRS
If you identify failures to comply with the Internal Revenue Code, you may be able to use the IRS Employee Plans Compliance Resolution System (EPCRS) to remedy your mistakes and avoid the consequences of plan disqualification. There are three ways to correct mistakes under EPCRS.

25. Self-Correction Program (SCP)
Permits a plan sponsor to correct certain plan failures without contacting the IRS or paying any fee.

26. Voluntary Correction Program (VCP)
Permits a plan sponsor to, any time before audit, pay a fee and receive IRS approval for correction of plan failures. The IRS issues a Compliance Statement detailing mistakes identified by the plan sponsor and the correction methods approved by the IRS. The plan sponsor corrects the identified mistakes within 150 days of the issuance of the Compliance Statement. While the IRS is processing the submission, Employee Plans will not audit the plan, except under unusual circumstances.

27. Audit Closing Agreement Program (Audit CAP)
Permits a plan sponsor to pay a negotiated sanction and correct a plan failure while the plan is under audit.

28. Correction Programs DOL
If you identify failures to comply with ERISA, you may be able to use the DOL correction programs to remedy your mistakes. There are two different DOL programs available, depending on the type of mistake you identify.

29. Delinquent Filer Voluntary Compliance Program (DFVCP)
Allows correction of late filings of Form 5500s.

30. Voluntary Fiduciary Correction Program (VFCP)
Allows correction of certain enumerated breaches of fiduciary duty resulting in a "no action" type letter from the DOL.

31. Questions and Comments
Susan S. Risinger Smith & Downey, P.A. 211 Hanahan Plantation Circle Charleston, South Carolina (843) (Direct Line) (843) FAX Barry K. Downey 320 E. Towsontown Blvd., Suite 1 East Baltimore, Maryland (410) (Direct Line) (410) FAX