(b)lines Ask the Experts – EPCRS Corrections Available for 457 Top-Hat Plans

May 13, 2014 (PLANSPONSOR (b)lines) – “We are a 501(c)(3) private tax-exempt employer that sponsors  a 457(b) top-hat plan for select management or highly compensated employees.

“We had an operational defect in this plan similar to one we previously experienced in our 403(b) plan. We were able to correct the 403(b) defect under the Internal Revenue Service’s (IRS) Employee Plans Compliance Resolution System (EPCRS). Can we correct the 457(b) defect under EPCRS as well?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers: 

Unfortunately, due to a nuance in the IRS corrective procedures for retirement plans, probably not.  For most plans, such defects can be corrected utilizing the EPCRS, which lists specific procedures for correction. However, Section 4.09 of EPCRS describes the availability of that program to correct 457(b) plan defects as follows:

“.09 Availability of correction for § 457 plans. Submissions relating to § 457(b) will be accepted by the Service on a provisional basis outside of EPCRS through standards that are similar to EPCRS. The availability of correction is generally limited to plans that are sponsored by governmental entities described in § 457(e)(1)(A). In the case of a § 457(b) plan that is an unfunded deferred compensation plan established for the benefit of top hat employees of a tax-exempt entity described in § 457(e)(1)(B), the Service generally will not enter into an agreement to address problems associated with such a plan. However, the Service may consider a submission where, for example, the plan was erroneously established to benefit the entity’s nonhighly compensated employees and the plan has been operated in a manner that is similar to a Qualified Plan.”

Thus, if you are a GOVERNMENTAL 457(b) plan, it is possible to correct defects in a manner similar to what is proscribed under EPCRS. Private tax-exempt 457(b) plans, however, do not appear to enjoy this luxury. The ONLY defect clearly eligible for correction in an EPCRS-like submission is for a plan that was erroneously established without the select management/highly compensated restriction at all, and the plan has been operated similar to a qualified plan. Note, too, that EPCRS does not address what the Employee Retirement Income Security Act (ERISA) consequences might be of having failed the top hat exemption.

Thus, it is unclear whether the IRS believes that defects under private tax-exempt 457(b) plans can be corrected or how. You should consult with benefits counsel well versed in such matters prior to taking any action.

Good luck!


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.