New IRS Compliance Program Should Be On Every Plan Sponsor’s Radar | Fox Rothschild LLP

The IRS announced in its June 3 Employee Plans Newsletter a new 90-day Pre-Examination Compliance Pilot Program. Under the program, which is in effect, the IRS will notify an employer that it intends to audit the employer’s retirement plan while also providing that employer with 90 days to identify any potential compliance failures and to correct those failures.

By way of background, the IRS created the Employee Plans Compliance Resolution System (EPCRS) in the interest of encouraging plan sponsors to voluntarily identify and resolve plan compliance failures. It was updated most recently in the form of Revenue Procedure 2021-30. EPCRS includes three unique correction programs: (i) Self-Correction Program (SCP), (ii) Voluntary Correction Program with IRS Approval (VCP), and (iii) Audit Closing Agreement Program (Audit CAP).

Through SCP, employers may self-correct certain types of mistakes without having to report either the failure or the correction to the IRS. When self-correction is not permitted (usually because of the nature or duration of the failure), the employer may voluntarily report the failure and secure IRS approval of the proposed correction through VCP, subject to payment of a modest compliance fee. However, once a plan is under IRS examination, Audit CAP is the only available option — it involves remediation of compliance failures under IRS supervision and subject to payment of sanctions that are significantly greater than VCP compliance fees.

The new pilot program provides added incentives to employers to assess (within the 90-day pre-audit period) their plan documents and operations to identify any errors of the type that could be remediated through self-correction or VCP. Any compliance failures that would be eligible for correction under SCP, but for the pending audit, may be corrected and reported to the IRS, without incurring any penalty. If the employer discovers failures that would not be eligible for SCP, these failures and the proposed corrections may be disclosed voluntarily to the IRS. In exchange for the voluntary and timely disclosure, sanctions will be calculated by the IRS based on the VCP fee structure (which maxes out at $3,500), rather than the normal Audit CAP guidelines. Additionally, after the IRS has considered the voluntary disclosure, it will decide whether to proceed with a limited or full scope audit or simply issue a closing statement, without conducting any audit.

Every employer that receives a 90-day notice immediately should engage in a comprehensive review of its retirement plan with its third-party administrator and legal counsel. Correction of any plan document defects or operational failures discovered should be made top priority to ensure timely compliance and response to the IRS.

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