In attempt to reduce the amount of time spent on retirement plan examinations, the IRS has announced it is piloting a new pre-examination retirement plan compliance program beginning June 2022. Here’s what you need to know.

What is the new 90-day compliance program?

Beginning in June 2022, the IRS will notify a plan sponsor by letter that its retirement plan was selected for an upcoming examination.

What should plan sponsors do once they receive a notice?

Once a plan sponsor receives a letter, they have a period of 90 days to review their plan’s documents and operations to assess whether or not the plan meets the current tax law requirements. The IRS will contact the plan sponsor to proceed with an exam if response is not received within the 90 days.

1. Self correction- If you receive a notice, you should promptly consult your plan service provider, auditor, or ERISA attorney, who can help you “self-correct” any errors in the plan’s documents or operations within that 90 day window.

2. Request a closing agreement from the IRS- If you discover that the failures are not eligible for self-correction under the programs (see below), you can request a closing agreement after which the IRS will use the VCP structure to assess how much your sanction amount will be. The IRS will review the documentation and assess whether the plan’s failures are accurately self-corrected. The IRS will then issue a closing letter or conduct a limited scope or full scope plan examination.

What kinds of errors can be self-corrected?

If your retirement plan has failed to satisfy certain requirements under Code Sec. 401(a), Code Sec. 403(a), Code Sec. 403(b), Code Sec. 408(k), and/or Code Sec. 408(p), the Employee Plans Compliance Resolution System (EPCRS) allows you to correct these failures and continue to provide your employees with retirement benefits.

The EPCRS consists of:

1. The Self-Correction Program (SCP)- As the IRS states, “You can self-correct many retirement plan errors without contacting the IRS or paying a fee. There are no application or reporting requirements. Self-correction, also known as the Self-Correction Program or “SCP,” is authorized under Revenue Procedure 2021-30, the revenue procedure that governs the EPCRS.” Examples of eligible failures that may be self-corrected, include, but are not limited to, not following contributions terms of the plan, not including eligible participants and not following the terms of the plan. The corrections are not approved by the IRS.
2. The Voluntary Correction Program (VCP)- As the IRS states, “If your retirement plan isn’t currently being audited by the IRS, and you have mistakes with either the language in the plan document or how you’ve run your plan, you can apply to correct the mistakes under the VCP. Correcting your plan mistakes through VCP preserves the plan’s tax-favored status.” Examples of eligible failures that may be voluntarily corrected, include, but are not limited to, not complying with federal tax laws while the plan is in operation, not following the terms of the plan document or maintaining an up-to-date plan document. As not all failures can be corrected under the SCP, the VCP is another option to protect the plan’s favorable tax status. The corrections are submitted to the IRS for review and approval.
3. The Audit Closing Agreement Program (Audit CAP)- As the IRS states, “A plan sponsor that does not come forward to the IRS, but whose retirement plan has significant problems that are discovered by the IRS on examination or during the determination letter application process, is entitled to correct significant mistakes under the Audit CAP to preserve the tax benefits associated with properly maintained retirement plans.” Under this program the IRS will require correction of the failures and sanctions are required to be paid by the plan sponsor.

What is the purpose of the pilot program?

The IRS hopes that the program will cut down the time spent on retirement plan examinations and reduce taxpayer burden.