On June 3, 2022, the IRS announced it is piloting a new 90-day pre-examination retirement plan compliance program. While receiving notice of an upcoming IRS exam is rarely welcome news, the new program gives employers an important opportunity to review their retirement plans for compliance issues, correct them, and notify the IRS. Doing so may avoid the IRS examination entirely or reduce the penalties that could otherwise apply. Although the guidance regarding this new program is still limited, we urge any employers who receive such a notification to take prompt action.
Background
For many years, the Internal Revenue Service (IRS) has sponsored the Employee Plans Compliance Resolution System (EPCRS), a program that allows plan sponsors to correct certain failures and allows them to continue providing employees with retirement benefits on a tax-favored basis. EPCRS generally consists of three components: the Self-Correction Program (SCP), the Voluntary Compliance Program (VCP), and the Audit Closing Agreement Program (Audit CAP). Under EPCRS, SCP and VCP are not available to plan sponsors that are under IRS audit. If the employer is under audit, correction of plan defects to avoid disqualification can only occur through Audit CAP, which often involves substantial monetary penalties.
90-Day Pre-Examination Retirement Plan Compliance Program
Under this pilot program, beginning in June 2022, the IRS will notify a plan sponsor by letter that its retirement plan was selected for an upcoming examination. The plan sponsor then has a 90-day window to review its plan’s documents and operations and determine if the retirement plan meets the current tax law requirements. If the plan sponsor does not respond, then the IRS will contact the plan sponsor and schedule an exam.
If,
upon review, the plan sponsor discovers failures in the plan’s documents or operations, then the plan sponsor may be eligible to self-correct these failures using the correction principles in EPCRS. The IRS will then review the documentation provided and determine if it agrees with the plan sponsor’s conclusions and that the failure(s) are appropriately corrected. Based on the IRS findings, the IRS will either issue a closing letter or conduct a limited-scope or full-scope examination.
If the failures discovered are not eligible for self-correction, then the plan sponsor can request a closing agreement, and the IRS will use the VCP structure to determine a sanction amount.
The IRS notes that "[o]ur goal with this program is to reduce taxpayer burden and reduce the amount of time spent on retirement plan examinations." At the end of this pilot, the IRS will evaluate the program’s effectiveness and decide whether it should continue to be part of the overall compliance strategy.
Practice Pointers
If your organization receives a letter from the IRS under this new program, you will need to take immediate action to begin an assessment of the tax-qualified
status of your plan. It may be advisable to engage counsel or other professionals to assist in your plan compliance review. Absent a formal letter, but in anticipation of this program, plan sponsors may want to consider a self-compliance audit to confirm that there are no current plan document and/or operational failures. As a reminder, any time an employer is using the self-correction procedures under SCP to try to cure a retirement plan error, it is best practice to document the correction methodology being used in case of a future audit.
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