Mistakes happen! When a mistake occurs in the operation of a qualified retirement plan, such as a 401(k) plan, timing is everything in identifying and correcting the mistake. Ideally, the plan sponsor or its third party administrator pro-actively monitors plan compliance and has procedures in place to identify plan errors – before the IRS does. Many such plan errors can easily be self-corrected under the IRS’ Employee Plans Compliance Resolution System (EPCRS) without IRS involvement. Other errors require IRS approval and payment of an often modest IRS “user fee” under the IRS’ Voluntary Correction Program (VCP).
However, until now, the only other alternative was for an error to be identified by IRS in a plan audit. On audit, correction of an error is more difficult and expensive, involving a closing agreement with IRS and payment of a penalty amount that is more costly than the VCP user fee. In a worst case scenario, IRS could even disqualify a plan that has not been operated correctly.
On June 3, 2022, IRS announced a temporary pre-examination (audit) retirement plan compliance program beginning in June 2022. Without historical precedent, IRS will give plan sponsors a warning that their plan has been selected for audit and 90 days to identify and correct any plan errors. If an identified error is eligible for self-correction under EPCRS, the error can be self-corrected. If the identified error is not eligible for self-correction, the plan sponsor can request a closing agreement with IRS, but the sanction amount will be determined under the much less costly VCP user fee schedule.
IRS will then review your documentation and if it agrees with your conclusions it will issue a closing letter. Otherwise, IRS will conduct a limited or full scope audit.
Together with our clients, we will continue to pro-actively monitor plans to avoid compliance issues. However, if a mistake occurs and IRS comes knocking, it will be very helpful to have a 90-day period to identify and correct any plan errors.
IRS says that at the end of the pilot program it will evaluate the program’s effectiveness and determine if the program should continue as part of its overall compliance strategy. We believe the pilot program should make it easier for employers to establish and maintain qualified retirement plans and will promote compliance with the tax laws.
If you have any questions or concerns about your qualified retirement plan or if you receive a 90-day notice from IRS under the pilot program, please feel free to reach out to Andrew Roth, a partner in our White Plains, New York, office at (914) 220-8033, ARoth@dmlawyers.com.
