June 22, 2022

401(K) CURRENT EVENTS:  IRS ANNOUNCES PRE-EXAMINATION COMPLIANCE PROGRAM

On June 3, 2022, the IRS announced on its “Employee Plans News” website a “pilot” pre-examination compliance program for retirement plans, including 401(k) plans. Beginning this month, the IRS will send a letter to sponsors whose plans have been selected for examination, giving them 90 days in which to review plan documents and operations and respond back to the IRS with any operational issues or defects that have been identified during the review. This should give plan sponsors an opportunity to correct certain defects in advance of the examination, potentially avoiding a lengthy examination, along with hefty fees and penalties.

Background. Qualified retirement plans, including 401(k) plans, are subject to a great deal of Federal laws, regulations, governmental agency rulings, and related requirements. The sheer amount and complexity of the legal mandates, coupled with the intricacy of day-to-day operations, almost assures an occasional slip-up under even the most carefully administered plans. And yet operational mistakes (or “failures”) can be costly, resulting in fees, sanctions, litigation, or even plan disqualification — even in relatively minor cases.

EPCRS to the Rescue. Recognizing the difficulties this situation can pose, the IRS developed the Employee Plans Compliance Resolution System (“EPCRS”). (For details about EPCRS, see our “Geek Out” reference article.)

  • EPCRS is a formal means by which plan sponsors or administrators may find and correct operational and other plan errors, before the IRS finds them on audit.
  • By finding and correcting errors proactively, plan sponsors and administrators can take corrective action at a fraction of the cost of what might otherwise be the case, were the IRS to catch the defects on audit or other investigative means.
  • Importantly, in the absence of the new pilot program, EPCRS is generally not available once the IRS has selected the plan for an examination or plan audit.

New Pilot Program Helps Further. Under the pilot program, the IRS will be giving plan sponsors a “heads up” that their plans are facing scrutiny.

  • Whereas previously hearing from the IRS would mean that all hope of self-correction of any errors had passed, now plan sponsors will have 90 days in which to discover any problems with the plan’s documents or operations.
  • If the review reveals any problems, plan sponsors may be able to self-correct these mistakes using EPCRS correction principles – thus saving a lot of trouble and expense.
  • Any mistakes found during the review that are not eligible for self-correction may be eligible for correction under a closing agreement, using the IRS  Voluntary Correction Program (“VCP”) fee structure to determine the amount of any sanctions payable.

The IRS Still Has the Final Word. The IRS will review the plan’s documentation and determine whether it agrees with the plan sponsor’s conclusions and correction methodology, which should be in accordance with the principles laid out in the EPCRS guidance.

  • If the IRS is in agreement, then it will generally issue a closing letter, although it may also elect to conduct either a limited or full scope examination of the plan.
  • If the IRS receives no response within the 90-day period, it will then schedule a full examination of the plan.

COMMENT: Plan sponsors who receive a “90-day letter” from the IRS are advised to immediately contact their ERISA counsel or other professional advisor, along with their TPA (if applicable), to assist with review of all pertinent plan documents, records, forms, and related items. Identification of problems and crafting an acceptable correction method under EPCRS guidelines requires time, so don’t delay! (For more information, please see our reference article.)

DISCLAIMER: This article is intended only as a brief overview of the latest IRS news release relating to the pilot pre-examination program for retirement plans, including 401(k) plans. It is not intended to address the details of 401(k) plan qualification, other legal requirements for plans, existing correction programs (including EPCRS), or similar topics. As always, please consult your own ERISA attorney or advisor for individualized advice concerning your own 401(k) plan.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.

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