In June 2022, the IRS launched the 90-Day Pre-Examination Compliance Pilot program. The program gives any retirement plan sponsor whose plan has been selected for examination 90 days to review the plan document and operations to determine if they satisfy all tax law requirements. Depending on its findings, the IRS will either issue a closing letter or conduct a limited or full-scope examination.
Pilot Program Goals
The IRS created this program to reduce taxpayer burden and the time spent on retirement plan examinations. At the end of the pilot period, the IRS plans to evaluate its effectiveness and determine whether it would be worthwhile to implement the program permanently. In particular, they will evaluate if the program reduced audit times and relieved audit burdens from plan sponsors. The IRS didn’t indicate how long the pilot program will last.
Opportunities for Plan Sponsors
The plan sponsor can use the 90-day time frame to determine compliance with applicable tax law requirements. If the plan sponsor discovers mistakes, it may determine to self-correct such errors using the self-correction principles under the Employee Plans Compliance Resolutions System, described in IRS Rev. Proc. 2021-30.
Self-Correction Process and Stipulations
Self-correction is generally available to fix certain document and operational failures. Under EPCRS, a plan document failure means a plan provision, or the absence of a plan provision, that on its face violates the requirements of the Internal Revenue Code. This would include a failure to adopt good-faith and interim amendments.
An operational failure occurs when there is a failure to administer the plan according to its terms—for example, improperly excluding an employee from the plan, failing to implement employee deferral elections, failing to correct excess allocations, overpaying or underpaing benefits, hardship distribution and loan failures, etc. Operational failures are either insignificant, as determined by EPCRS, or significant. If insignificant, they may be corrected at any time. Document failures eligible for self-correction and significant operational failures usually must be fixed by the last day of the third plan year after the plan year in which the failure occurred.
Rev. Proc. 2021-30 also provides that a plan sponsor may use self-correction to fix an operational failure by adopting an amendment to conform the plan’s terms to the plan’s operation if the amendment would increase a benefit, right, or feature. This increase would be permitted under relevant provisions of the Internal Revenue Code and the general correction principles of EPCRS. One of the most important advantages of self-correcting a plan would be no fees or sanctions.
The IRS also noted that if a particular mistake isn’t eligible for self-correction, the plan sponsor may request a closing agreement from the IRS. However, the IRS indicated it would use the Voluntary Correction Program fee structure to determine the sanction amount that a plan sponsor would pay under a closing agreement, which generally is significantly less than under Audit Closing Agreement Program.
After reviewing their plans, sponsors must submit documentation regarding their compliance and any corrections. If the IRS agrees with a plan sponsor’s conclusions, it will issue a closing letter. If not, a limited or full-scope examination will be conducted.
Immediate Next Steps for Plan Sponsors
First, plan sponsors should consider performing a compliance review. Conducting a detailed review to identify and correct plan errors identified by the IRS often takes longer than 90 days because information needed to complete the review is held by third-party record keepers and administrators.
Plan sponsors also should consider performing periodic internal compliance reviews to confirm that all applicable requirements are being satisfied. Additionally, if contacted by the IRS, plan sponsors should respond quickly. If the IRS doesn’t receive a response within 90 days, it will contact the employer to schedule an exam.
Finally, plan sponsors should be proactive. Corrective actions will be significantly less expensive for a plan sponsor that self-identifies errors. Be sure to identify and correct errors as soon as they are discovered. It is important to keep in mind that the annual audit required for plans with 100 or more participants is a financial audit of the plan’s assets and usually doesn’t include a compliance review of plan documents and administration and therefore may not uncover compliance issues.
Increased Auditing on the Horizon
Despite what happens with the pilot program, plan sponsors may begin to see an increase in IRS auditing, thanks to the Inflation Reduction Act, which will allocate about $79.6 billion to the IRS over the next 10 years. Under the new law, $45.6 billion of the increased funding will be allocated towards enforcement, including examinations, collections, criminal investigations, legal and litigation support, and digital asset monitoring. This additional funding may lead to more audits of benefit plans, which means plan sponsors should prepare by being proactive and identifying and correcting errors as soon as they are discovered.
Plan sponsors should promptly consult their benefits advisers upon receiving an IRS notice to discuss the legal and other considerations applicable to moving forward under the 90-day pre-examination compliance program.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Susan Neethling is of counsel in Best Best & Krieger LLP’s Sacramento office. A member of the firm’s employee benefits and executive compensation practice group, she has 30 years of experience in the employee benefits consulting and legal field.
Helen Byrens is an associate in Best Best & Krieger LLP’s Los Angeles office. As a member of the firm’s business practice group, she focuses her practice on employee benefits and tax law.
We’d love to hear your smart, original take: Write for Us