Few things raise a plan sponsor’s anxiety level more than receiving a “your plan has been selected for examination” letter from the IRS. The IRS chooses which plans to examine (i.e., audit) through either random selection (comparing entries on the plan sponsor’s regulatory filings to “norms” for similar returns) or because of related examinations of the plan sponsor, another plan, or a plan service provider. A new pilot program from the IRS looks to alleviate the anxiety from these examinations.
Pilot Program Overview
On June 3, 2022, the IRS announced a new pilot program for tax qualified retirement plans (which appears to include 403(b) plans), that offers plan administrators the chance to self-identify and correct compliance failures before the IRS initiates its examination. The new program gives plan sponsors a 90-day “heads up” that the IRS intends to examine their retirement plan.
The goal of this pilot program is to reduce taxpayer burden through the potential to limit the scope of examinations and encourage plan sponsors to correct under SCP or the VCP fee structure rather than through the Audit Closing Agreement Program (Audit CAP) which imposes higher fees/penalties for compliance failures and requires more IRS resources. The program is designed to reduce the resources the IRS spends on these examinations. The pilot program is in place for a short time only but may be extended or modified if it proves to be effective at reaching its goals.
How the Program Works
During the 90-day window plan administrators can review plan documents and administrative procedures and self-correct any identified deficiencies. A plan can then use the IRS’ self-correction procedures (SCP) included in the Employee Plans Compliance Resolution System (EPCRS) to address many common plan administration failures. For issues that are correctable through SCP, the IRS will review the documented correction procedures and, if acceptable, will issue a closing letter confirming their acceptance of the correction.
Compliance failures that cannot be addressed through SCP are subject to the EPCRS Audit Closing Agreement Program (Audit CAP). The main benefit of this pilot program is that the fees assessed through corrections self-identified during (or before) the 90-day period may qualify for the reduced fee structure included in the EPCRS Voluntary Compliance Program (VCP) rather than being subject to negotiation with the IRS under Audit CAP. When negotiating sanctions for compliance issues found during examination, the IRS usually imposes fees higher than plans would have paid under VCP to penalize plans for the IRS finding the error rather than the plan administrator.
Even if the plan does self-identify compliance failures, the IRS may continue with a limited-scope or full-scope examination. While not stated, the announcement from the IRS suggests that plan administrators who take advantage of the opportunity to identify and self-correct administrative issues may avoid further examination. If the plan administrator does not respond to the IRS letter within 90 days, IRS will start its examination of the plan.
For a full-scope examination the IRS typically makes extensive document requests including copies of legal plan documents and detailed support for plan contributions and distributions made during the period under examination. A full scope examination can also include on-site visits from the IRS and interviews with employees in charge of the day-to-day plan administration. A limited scope review focuses on only certain aspects of plan administration and is typically far less time consuming and expensive.
“The time to repair the roof is when the sun is shining.” – John F. Kennedy
Those who have been through a plan compliance correction know that 90 days is not a lot of time to design and execute a correction procedure – and with the IRS pilot program, much of that time may be spent reviewing plan documents and operations. It’s not clear whether an extension of time to complete the correction is available under the pilot program.
Bolton recommends that plan sponsors conduct their own compliance assessment now, especially if it’s been more than five years since the last time plan administration practices and procedures were reviewed. While ERISA audit reviews have become more robust in recent years, even plans subject to the annual ERISA audit requirement may have problems that are outside the scope of the audit review.
Some plans that may have higher compliance risk include those:
- Without outside ERISA counsel that supports plan document updates;
- Not subject to the annual ERISA audit requirement;
- Administered in-house (rather than by the plan’s actuary or a third party administrator (TPA));
- That have been with the same actuary or TPA for many years;
- That have been closed or frozen for many years; or
- Where the sponsor has recently changed payroll or HRIS systems.
Our team of actuaries and plan administration consultants are here to help defined benefit and defined contribution plan sponsors design a compliance review process appropriate for their level of risk.