The Internal Revenue Service (IRS) has recently issued an updated version of the Employee Plans Compliance Resolution System (EPCRS). This new guidance, Revenue Procedure 2003-44, marks the fifth revision to the EPCRS since the consolidation of IRS correction programs in 1998. The revision expands the program and illustrates the IRS’s focus on self-audit procedures and voluntary compliance by making the system more predictable and fees more reasonable. The important implications for sponsors of tax-qualified and other covered retirement plans are further summarized below.
The structure of the EPCRS remains unchanged in the updated guidance. There are three main programs for plan sponsors to use:
Self-Correction Program (SCP)
Only certain types of plans and operational failures are eligible for this simplest of the EPCRS correction programs. Plan sponsors identify and correct operational failures under their plans without notifying the IRS or paying a fee. Guidelines are provided as to the nature and extent of acceptable corrections for various types of failures.
Voluntary Correction Program (VCP)
Plan sponsors submit an application to the IRS explaining the plan qualification failure and proposed correction, along with a fee, and receive in return a letter from the IRS approving the correction and agreeing not to seek plan disqualification on that failure if the proposed corrections are fully implemented.
Audit Closing Agreement Program (Audit CAP)
If a plan is already under examination, plan sponsors can correct failures with IRS approval under Audit CAP. Plan sponsors are subject to stiffer monetary sanctions under this program, in addition to the costs of the correction.
Changes to the EPCRS
Under Revenue Procedure 2003-44, application procedures have been simplified. For example, group submissions have a new notice requirement in lieu of the previous burdensome power of attorney requirement. In addition, a few new correction options are available for certain operational failures, and a new provision allows plan sponsors who failed to amend their benefit plans for the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) legislative changes to correct the failure and pay a reduced fee. Also, primarily for the benefit of smaller employers, Revenue Procedure 2003-44 expands the EPCRS to allow SIMPLE IRA plans limited access to correction procedures and to expand the access that SEPs were previously allowed.
In addition, the cost of an EPCRS application under the VCP program has been reduced. Example submissions have been provided for plan sponsors to use as models and, for most plan sponsors, the fixed fee schedule now ranges from $750 to $25,000, rather than from a variable $500 to $70,000 fee range. On the other hand, the IRS has broadened the scope of plan sponsors required to use the Audit CAP program, and Audit CAP sanction amounts have not been reduced.
Implications for Employers
The publication of the Revenue Procedure is a timely reminder to employers of the increasing importance of establishing a self-audit program and utilizing the EPCRS process if covered qualification failures are identified. The IRS is communicating to sponsors strongly that since the relatively lenient SCP and VCP programs are available and publicized, a plan sponsor that has not carried out reasonable self-audit procedures and utilized one of these two programs to correct any identified failures properly will likely find the IRS much less understanding and its sanctions potentially severe if the IRS identifies those failures on audit. In light of the IRS emphasis on use of the EPCRS and the lack of access to the SCP and VCP for plans under audit or tax-qualification review, employers should establish regular self-audit procedures and consider entering the program for the correction of any existing failures. Use of the voluntary SCP and VCP components of the program typically result in either no fee or a substantially smaller, more predictable fee than the sanctions applicable once the IRS identifies the failure first and the Audit CAP program becomes the sole correction option.
If you would like more information about how to set up a self-audit program, or if you would like to have existing issues reviewed and assessed in view of the EPCRS programs, please contact your regular McDermott, Will & Emery lawyer or members of our Employee Benefits Group by clicking on one of the names listed on the right side of this page.