On June 3, 2022, the IRS announced it is launching a pilot pre-examination retirement plan compliance program, which generally will be effective immediately (June 2022). This pilot program essentially gives plan sponsors a heads up prior to an IRS audit of their tax-qualified retirement plan, such as a 401(k) or defined benefit plan, and allow such plans to potentially use the IRS self-correction program to fix any discovered errors at a lower cost.
The Employee Plans Compliance Resolution System (EPCRS) is the IRS system through which plan sponsors can correct errors in the form and operation of certain retirement plans intended to satisfy the requirements of Sections 401(a), 403(a), 403(b), 408(k) or 408(p) of the Internal Revenue Code. Unless properly corrected, such errors may result in the loss of a retirement plan’s favored tax status under the code.
Three programs comprise EPCRS:
- Self-Correction Program (SCP). SCP is a means of correcting a retirement plan’s operational failures and certain plan document failures, without involving the IRS. To use SCP, an employer must correct the failure in a prescribed manner and then document the correction in a detailed memorandum. Failures that can be corrected by SCP are divided into “insignificant” failures, which can be corrected at any time, and “significant” failures, which must be corrected within a certain time period, generally by the last day of the third plan year following the plan year in which the failure occurred.
- Voluntary Correction Program (VCP). VCP requires filing an application and paying a fee to seek IRS approval of the correction. The advantage of VCP is that it can be used to correct a broader range of failures than SCP, including certain additional plan document problems and “significant” failures not corrected within SCP’s required time period. All VCP submissions must be made electronically.
- Audit Closing Agreement Program (Audit CAP). Unlike SCP and VCP, the IRS initiates Audit CAP, which applies to plans under examination. Audit CAP involves taking IRS-approved corrective actions, paying a negotiated penalty and entering a closing agreement with the IRS.
Regardless of which program applies, EPCRS generally requires full correction of the failure, which means the impacted participants and the plan must be made whole.
New IRS Pilot Program
By implementing this program, the IRS hopes to reduce taxpayer burden and collective time spent on retirement plan audits. The IRS noted that the pilot program will be of limited duration and the agency will evaluate the program’s effectiveness to determine whether to continue the pilot as part of its overall compliance strategy.
The IRS kept its announcement brief; however, following are some takeaways regarding the new pilot program:
- 90-Day Advance Notice. A plan sponsor will receive a letter from the IRS approximately 90 days before the IRS intends to schedule an examination of a qualified plan. If the plan sponsor does not respond within 90 days, the IRS will reach out to schedule the examination.
- Self-Correction of Errors. The plan sponsor can use the 90-day window to review plan documentation and operations to determine compliance with current/applicable tax law requirements. If the plan sponsor discovers mistakes in plan documentation/operation, it may determine to self-correct such errors using the SCP, as outlined in Revenue Procedure 2021-30.
- The IRS indicated that it will review self-corrections to determine whether plan sponsors appropriately corrected any mistakes. Following this review, the IRS may issue a closing letter or conduct a limited or full-scope examination.
- Mistakes that are ineligible for SCP may be considered under a closing agreement, using the fee structure noted immediately below.
- Reduced Fees Outside of Self-Correction: If a plan sponsor discovers mistakes that are not eligible for SCP, then the plan sponsor may request a closing agreement from the IRS. The IRS will apply the VCP fee structure, rather than the Audit CAP fee structure (which tends to be greater than VCP), to determine the penalty amount the plan sponsor will pay under the closing agreement.
The pilot program is a welcome development for plan sponsors wishing to ensure their plans maintain their tax-qualified status. Employers who are notified should quickly work with their plan advisers to determine whether any compliance issues exist and, if so, the appropriate corrective measures under EPCRS.
For further information, please contact one of the authors — Robert B. Wynne or Alexia Faraguna — or any other member of McGuireWoods’ employee benefits team.