IRS Launches Pre-Examination Retirement Plan Compliance Program Trial – Employee Benefits and Compensation

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Employers will have the ability to review and self-correct retirement plan failures after they are identified for plan review by the Internal Revenue Service (IRS). The IRS announced in early June 2022 the rollout of a new pre-examination compliance pilot program in an effort to save resources spent on employee benefit plan audits. The announcement said the IRS would evaluate the program at the end of the pilot period, but it did not specify how long the period would be.

Under the new program, the IRS will send a letter to an employer with a plan that has been selected for review. The letter will inform the employer that they have ninety days to complete a self-examination. The IRS will schedule a review if the employer does not respond to the notice within the ninety day period.

An employer who receives a notice of screening may wish to review their plan documents and transactions to ensure that they comply with all applicable laws. If deficiencies are identified that are eligible for correction under the IRS Employee Plans Compliance Resolution System (EPCRS) guidance, the Pre-Examination Program allows employers to submit a self-correction to the IRS under the applicable remediation program. These correction programs include the Self-Correction Program (SCP) and the Voluntary Correction Program (VCP). Eligibility for correction programs depends on the type and magnitude of the errors involved. Importantly, the employer must notify the IRS within the ninety-day window that they choose to use the pilot program to make corrections.

The best case scenario is if the employer’s review during the ninety-day pre-review period allows for correction through the SCP. However, if the employer’s review during the ninety-day pre-review period reveals compliance failures that are not eligible for the SCP via the EPCRS, the employer, with the agreement of the IRS, may correct such failures in accordance with Revenue Procedure 2021-30 and request a closing agreement that will set the penalty amount based on the VCP fee schedule. Ultimately, the IRS will review the employer’s submission and determine if the failures have been properly self-corrected. The IRS may decide to (1) agree to remedy the defaults through SCP, which would not involve a closing agreement; (2) agree to a resolution through the Closing Agreement; or (3) “perform a limited or full review”.

This pilot program is important because normally employers that the IRS has selected for an audit no longer have the ability to self-correct under the SCP or VCP. The only remediation program available at this point is the Audit Closure Agreement Program (Audit CAP). This program uses a much higher penalty fee structure than the VCP, which caps fees at $3,500.

Therefore, the new IRS pre-examination program provides employers with a valuable opportunity to proactively correct plan errors with reduced exposure to penalties and avoid audits, which can take months or, in some cases, more than a year. According to the annual IRS data book, in 2021, the IRS conducted 3,067 pension plan audits, which covers only a small percentage of the pension plan universe. The benefit to the IRS of using this pre-examination program is to be more efficient when choosing which plans to audit, potentially increasing the number of pension plans with which the IRS has points of contact.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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