Professional Practice Insurance Brokers, Inc. is pleased to present The Benefits Professional, a newsletter series designed to provide industry insight from recognized and respected attorneys. PPIB is an industry leader in providing professional liability insurance and quality service. Our program recognizes the importance of access to qualified legal counsel for the defense of claims and/or lawsuits, as well as access to valuable information to assist service providers in preventing claims and/or lawsuits.
In this issue, Leslie A. Klein, a partner in the international law firm of Sonnenschein Nath & Rosenthal, provides an overview of the IRS Voluntary Compliance Programs. Mr. Klein has extensive experience in all aspects of employee benefits and executive compensation law, and regularly represents plan sponsors, third party administrators, and plan fiduciaries. Prior to joining Sonnenschein, Mr. Klein was a trial attorney in the Chicago office of the District Counsel of the Internal Revenue Service where he was responsible for employee benefits cases. Future issues of The Benefits Professional Report will discuss in detail the different programs available through the Employee Plans Compliance Resolution System, and relevant issues to consider.
We hope you find the newsletter series informative and valuable.
The rules specifying the requirements for tax qualified plans have become increasingly voluminous, technical and detailed over the last 25 years. In addition, the Internal Revenue Service (the "IRS") has taken the position that any error in operation or documentation of a plan, no matter the size or significance, is a sufficient basis for plan disqualification. This approach is a drastic change from the informal method used for numerous years by the IRS of freely allowing plan sponsors to correct any such defects with plan disqualification being applied only in the most extreme cases. As a result of these strict rules, if a plan failure is discovered by a third party administrator, the TPA should advise the plan sponsor of the failure and work with the sponsor and its counsel in correcting the failure.
Plan failures may be corrected under several programs established by the IRS to assist plan sponsors in maintaining a plan's qualified status. Relief may be found through either the Determination Letter Program, the Remedial Amendment Period found in Section 401(b) of the Code, or through several other IRS programs. These programs include the Administrative Policy Regarding Self-Correction ("APRSC"), the Voluntary Compliance Resolution Program ("VCR"), the Closing Agreements Program ("CAP"), and the Tax-Sheltered Annuity Voluntary Correction Program ("TVC") for Section 403(b) plans. Within the VCR Program there is also a Standardized VCR ("SVP") Program. Additionally, the original Closing Agreement Pilot Program has evolved into two separate and distinct programs, one for voluntary requests, ("Walk-in CAP") and another for involuntary requests ("Audit CAP").
These programs are described in Revenue Procedures 98-22, I.R.B. 1998-11, and 99-13, I.R.B. 1999-5, and form the Employee Plans Compliance Resolution System ("EPCRS"). One of the primary goals of EPCRS is to reduce the uncertainty surrounding the potential liability for correcting plan failures by providing guidance on both acceptable correction methods and on the amount of the sanction or compliance fees that will be imposed by the IRS. For example, Revenue Procedure 98-22 provides a uniform set of correction principles and clarifies that there may be more than one acceptable method of correcting plan qualification failures, and also permits, in certain circumstances, the use of reasonable estimates when making corrections. Revenue Procedure 98-22 also allows plan sponsors to rely on EPCRS when correcting plan defects. Previously, there had been some doubt as to whether plan sponsors could rely on the availability of APRSC and Audit CAP, which, prior to the elevation of their status in Revenue Procedure 98-22, had only been included in Field Directives or the Internal Revenue Manual.
Within EPCRS, the appropriate program in any given case will depend on the type of plan involved and the type of qualification failure disclosed (i.e., a Plan Document, an Operational or a Demographic Failure). A Plan Document Failure is the presence (or absence) of a plan provision that, on its face, violates the requirements of Section 401(a) or 403(b) of the Code. For example, the failure to include new qualification requirements within the plan's remedial amendment period is a Plan Document Failure. Plan Document Failures must be corrected through either Walk-in or Audit CAP, or with respect to Section 403(b) plans, the TVC program.
An Operational Failure is any qualification failure that arises solely from the failure to follow the plan's terms. Operational Failures may be cured through either APRSC, VCR, SVP, Walk-in or Audit CAP, or with respect to Section 403(b) plans, APRSC or the TVC program. Demographic Failures may be cured under Walk-in or Audit CAP or under the TVC program in the case of 403(b) Plans. A Demographic Failure is a plan's failure to satisfy the nondiscrimination requirements of Sections 401(a)(4), 401(a)(26) and 410(b) of the Code that is not an Operational Failure. In addition, under Revenue Procedure 99-13, an employer that is not otherwise eligible to maintain a Section 403(b) plan may now, for the first time, use TVC to correct the situation without causing adverse tax consequences to the affected employees or the participating employer. Under TVC, a Section 403(b) plan benefiting the employees of an ineligible employer may continue to be treated as a Section 403(b) plan provided it is frozen and all contributions to it cease on the date the TVC application is filed with the IRS.
EPCRS may not, however, be used to cure qualification failures that involve the misuse or diversion of plan assets. Also, excise taxes and penalties, to the extent applicable, will generally not be waived or reduced by correcting the qualification failure under EPCRS. However, correcting the failure under EPCRS should stop the future accumulation of the excise tax or penalty.
Each of the programs included under EPCRS has different goals and requirements, and therefore, may ultimately lead to different results. Although plan sponsors may be forced into one program or another based on the plan's ability to meet the program's eligibility requirements, different programs may provide more favorable results in different areas. This is because the amount of the sanction or compliance fee that is required and the IRS office processing the case differs depending on the program chosen. Therefore, wherever possible, plan sponsors and their advisors should strategically attempt to place the plan under the program that provides the best opportunity for the results desired.
The guidance provided in Revenue Procedures 98-22 and 99-13 is a welcome development because it increases the predictability of both the method of correction and the compliance fees or sanctions that will be imposed by the IRS. In future articles we will discuss the eligibility requirements of each of the programs mentioned above and will provide guidance on how to determine which program is best for correcting specific types of qualification failures.
Copyright 1999 by Professional Practice Insurance Brokers, Inc., a Hilb, Rogal & Hamilton Company. Reprinted with permission from The Benefits Professional Report, June 1999 (vol I, issue I).