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Homework and Deadlines Matter: New IRS Pre-Audit Compliance Program for Retirement Plans

Retirement plan sponsors should be aware of a new Internal Revenue Service (IRS) pilot program, which permits plan sponsors to conduct a pre-examination “check-up” of retirement plan administration before the IRS begins a plan examination. As part of the program, the IRS will send a letter notifying a plan sponsor that its retirement plan has been selected for an upcoming examination and give the plan sponsor 90 days to identify and voluntarily correct any compliance issues that may be self-corrected. Failure to respond by the 90-day deadline will result in an examination. Retirement plan sponsors who receive a pre-examination notice should immediately begin working with their lawyers and other advisors to determine the best way to respond to the IRS notice.

PRE-EXAMINATION PILOT PROGRAM

The IRS pre-examination compliance pilot program gives plan sponsors a chance to correct certain errors before an examination begins. If a plan sponsor identifies errors, then the plan sponsor may be able to self-correct using the procedures set forth in the IRS Employee Plans Compliance Resolution System (EPCRS) program, and the plan sponsor may notify the IRS of its corrective actions. If mistakes are not eligible for self-correction, the plan sponsor may request a closing agreement. With a closing agreement under the pilot program, the IRS will apply the Voluntary Correction Program (VCP) fee structure to determine the sanctions amount rather than the Audit CAP Program fees, which are unpredictable and typically higher. The IRS will review the plan sponsor’s corrective actions and determine whether it agrees that the plan sponsor appropriately corrected the mistakes. The IRS will then determine whether to issue a closing letter or to conduct a limited or full scope audit. The pilot program begins in June 2022.

It’s not clear what factors the IRS will consider when determining whether to conduct a limited or full scope audit following a plan sponsor’s response. However, it stands to reason that a plan sponsor’s efforts at good faith compliance with the correction requirements may serve to limit the scope because typically the IRS wishes to promote self-correction efforts. It’s also not clear whether the 90-day pre-examination period will apply to all retirement plan audits or only to those randomly selected to be part of the pilot program.

NEXT STEPS FOR PLAN SPONSORS

Plan sponsors who receive a pre-examination notice should immediately begin working with their lawyers and other advisors to determine the best ways to respond to the IRS notice. If you receive an initial letter or have questions about the IRS compliance and correction programs, please contact your McDermott lawyer or the authors listed below.




Deja Vu with Retirement Plan Extension 2

In response to the administrative difficulties faced by plan administrators due to the ongoing COVID-19 pandemic, the Internal Revenue Service (IRS) recently issued Notice 2020-35, which extends additional retirement plan deadlines for 2020 not previously extended under IRS Notice 2020-23. The IRS also stated that this relief applies for purposes of ERISA if the tax code deadline has a corresponding ERISA provision.

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IRS Expands Self-Correction Program, Provides Welcome Relief for Plan Sponsors

The IRS recently released an updated version of EPCRS, the IRS’s program for correcting errors that occur under tax-qualified retirement plans. The latest version of EPCRS makes it easier for plan sponsors to self-correct certain types of plan loan, operational and plan document failures without filing a VCP submission.

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IRS Corrections Go Digital in 2019

Late last month, the IRS released the latest version of its Employee Plans Compliance Resolution System, the IRS’s program for correcting retirement plan errors. The newest version of the correction program—effective beginning in 2019—includes mostly minor changes and clarifications. Most importantly, however, it requires electronic filing of Voluntary Correction Program submissions beginning April 1, 2019.

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New VCP Compliance Fees Will Increase the Cost of Correcting Some of the Most Common Plan Errors

Last month, the Internal Revenue Service (IRS) published Revenue Procedure 2018-4, which modified the user fee schedule for submissions under the IRS’s Voluntary Correction Program (VCP).

Under the new fee schedule, all VCP compliance fees are now based on the total net plan assets reported on a plan’s annual Form 5500-series return. This means that for VCP submissions filed on or after January 2, 2018, compliance fees will be:

  • $1,500 for plans with assets of $500,000 or less;
  • $3,000 for plans with assets of over $500,000 to $10,000,000; and
  • $3,500 for plans with assets of over $10,000,000.

Prior to January 2, 2018, compliance fees were generally based on the total number of plan participants reported on a plan’s Form 5500, and ranged from $500 (for plans with 20 or fewer participants) to as much as $15,000 (for plans with 10,000 or more participants). In addition, special reduced compliance fees applied to VCPs involving some of the most common plan failures (e.g. certain plan loan and required minimum distribution failures). However, under the new fee schedule, most reduced fees have been eliminated. Only the reduced user fee for group submissions and the special fee waiver for terminating orphan plans remains unchanged.

Ultimately, for many large plan sponsors, the new asset-based fee schedule could significantly reduce the VCP compliance fee for correcting certain plan errors. However, for small plans covering fewer than 100 participants, the cost of correcting plan errors will increase to at least $1,500 (and perhaps even more, depending on the total net assets held by the plan). In addition, for all plan sponsors, the cost of correcting many of the most common plan errors will actually increase significantly.




IRS to Begin Compliance Checks of Non-Governmental Section 457(b) Plans

by Mary K. Samsa, Todd A. Solomon and Joseph K. Urwitz

The Internal Revenue Service recently announced it was conducting “compliance checks” of Section 457(b) plans. This newsletter discusses what those compliance checks involve as well as the steps Section 457(b) plan sponsors should take given this announcement.

To read the full article, click here.




IRS Updates Employee Plans Compliance Resolution System

by Lisa K. Loesel, Mary K. Samsa and Kary Crassweller

The Internal Revenue Service (IRS) recently updated the Employee Plans Compliance Resolution System (EPCRS), the comprehensive system of correction programs for sponsors of qualified retirement plans.  The components of EPCRS continue to be the Self-Correction Program, the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program.  This newsletter describes some of the significant changes to EPCRS, including revisions to the VCP submission procedures and enhanced access for 403(b) plans.

To read the full article, click here.




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