The Employee Plans Compliance Resolution System (EPCRS) offers the sponsors of eligible retirement plans the opportunity to remedy disqualifying defects. In this issue of The Benefits Professional Report, attorneys Leslie A. Klein and Hilary Duke of Sonnenschein Nath & Rosenthal continue their series on EPCRS, focussing now on Walk-in CAP.
For third party administrators (TPAs) it is important to maintain professional liability insurance that will defend, and if applicable, indemnify the TPA with respect to errors discovered through internal audit. With a plan sponsor potentially unaware of an existing disqualifying defect, and absent a claim and/or lawsuit, an argument could be made that there is no coverage for this type of situation. Having made the investment in professional liability insurance, confirming the policy will respond, perform, and provide access to competent ERISA legal counsel for guidance is highly recommended.
As always, we hope you find the newsletter series informative and of value. We invite your feedback and suggestions for future topics of interest.
The Internal Revenue Service ("IRS") has established several programs to assist plan sponsors in maintaining a plan's qualified status. In previous newsletters, we have discussed APRSC and the VCR program. Another program plan sponsors may use is the Walk-in Employee Plans Closing Agreement Program ("Walk-in CAP"). Walk-in CAP was incorporated into the Employee Plans Compliance Resolution System ("EPCRS") under Revenue Procedure 98-22. The IRS recently updated EPCRS in Revenue Procedure 2000-16 to consolidate its 1998 and 1999 guidance.
Under Walk-in CAP, a plan sponsor is able to voluntarily correct plan failures by negotiating with the IRS on a correction method and on the amount of the correction fee. Once agreement is reached and steps have been taken to make correction, a closing agreement is entered into that is binding upon both parties. The closing agreement, if complied with, provides the sponsor with assurance that the IRS will not challenge matters addressed within the agreement.
The primary advantages of using Walk-in CAP, as discussed below, are that it can be used anonymously and that it may provide sponsors flexibility in selecting which programs to use. Third party administrators can assist sponsors in determining which voluntary programs are available for correction and which programs will better serve their needs.
Forum Issues
One consideration in evaluating the available programs is the differences in administration. While the National Office is responsible for the VCR program, the IRS key district offices run the Walk-in CAP program.
The key district offices are given guidance on how to deal with certain plan defects. However, the chief of the Employee Plans division of each key district office retains discretion in reaching a closing agreement. As a result, there is a lack of uniformity in solutions among the key district offices.
Third party administrators may be able to help guide plan sponsors with respect to certain choices of forum. For example, certain issues may be able to be submitted under either Walk-in CAP or VCR. If there are issues eligible for VCR (i.e. operational failures) and at least one issue eligible for Walk-in CAP (i.e. plan document error or no determination letter), a sponsor may choose to submit all of the issues under Walk-in CAP or only the issues eligible for Walk-in CAP. Therefore, some flexibility may exist as to choice of forum between the National Office and the key district offices.
Eligibility and Program Submission
A plan sponsor may correct operational, plan document, and demographic failures under Walk-in CAP. To be eligible, a plan must not be under examination by the IRS and must not be eligible for the VCR program. A plan not eligible for the VCR program because (1) the plan does not have a favorable determination letter, (2) the failure is not an operational failure, or (3) the violation is considered egregious, will be eligible under Walk-in CAP.
A Walk-in CAP request consists of a letter that contains a description of the failures, the proposed methods of correction, and other procedural items. Supporting documentation, such as a copy of the most recently filed Form 5500 and a copy of the relevant portions of the plan document, must be included. A determination letter application does not satisfy the submission requirements.
Correction Method
The plan sponsor and the key district office must agree upon a correction method. Correction must be made for all years, including years closed under the statute of limitations.
Under certain circumstances, a plan sponsor may correct an operational failure by means of a retroactive amendment. For example, Revenue Procedure 99-31 provides that a retroactive amendment to permit hardship distributions may be used so long as the amendment would satisfy the requirements of Code Section 401(a) had the amendment been adopted before hardship distributions were made to participants. This method is permitted only under Walk-in CAP. In determining whether a plan sponsor may use a retroactive amendment, IRS officials have indicated that they will consider the number and type of employees affected by the failure and information communicated to employees.
Compliance Correction Fees
Walk-in CAP requires the payment of a negotiated compliance correction fee. The method of determining the amount of the fee changed under EPCRS. Under EPCRS, there is a graduated range of fees based on the size of the plan.
The amount of the fee is based on a presumptive amount, which ranges from $2,000 for a plan with 10 or fewer participants to $35,000 for a plan with 10,000 or more participants, and is adjusted based on factors relating to the nature, extent, and severity of the failure. Factors include: (i) whether the defect is a failure to satisfy Sections 401(a)(4), 401(a)(26) or 410(b), (ii) whether the plan has both operational and plan document failures, (iii) the time period over which the violation occurred; and (iv) whether the plan has a favorable determination letter. The IRS has not provided guidance regarding the significance of the factors or the relevance of certain errors in determining the fee amount.
Revenue Procedure 2000-16 also provides for a minimum fee equal to the VCR user fee and a maximum fee, ranging from $4,000 for a plan with 10 or fewer participants to $70,000 for a plan with 10,000 or more participants. In egregious cases, the presumptive amount does not apply and the maximum fee is increased.
"John Doe" Requests
All key district offices now accept "John Doe" requests, under which negotiations take place anonymously. The plan sponsor is not identified until the closing agreement is signed. This permits a plan sponsor to submit a request under the program, attempt to negotiate a correction, and decide not to enter into a closing agreement, without triggering an IRS examination.
By permitting "John Doe" requests, Walk-in CAP encourages voluntary compliance by plan sponsors who are reluctant to disclose their identity to the IRS. Because of the varied results among key district offices, and because of the uncertainty in costs associated with correction methods and fees, plan sponsors may want to maintain the flexibility to not enter a closing agreement. Without anonymity, if a plan sponsor and the IRS cannot reach agreement, all aspects of the plan may be examined, and the rules pertaining to Audit CAP will apply.
Conclusion
In correcting plan failures, one of the first steps is to determine which programs are available for correction and which may be the most advantageous to use. Walk-in CAP provides the advantages of anonymity and flexibility in choosing the forum for negotiating with the IRS. Third party administrators can assist plan sponsors in determining whether Walk-in CAP, or a combination of programs, should be utilized, depending upon the type of plan failure and the needs of the sponsor.
Copyright 2000 by Professional Practice Insurance Brokers, Inc., a Hilb, Rogal & Hamilton Company. Reprinted with permission from The Benefits Professional Update, First Quarter Report.