The Internal Revenue Service (IRS) recently announced in its electronic newsletter that it will provide limited transitional relief to 403(b) plan sponsors that are under audit or that receive notice of an audit between now and April 1, 2013. Though plans under audit typically cannot voluntarily correct plan errors (and must pay a higher penalty to correct those errors), plan sponsors availing themselves of the transitional relief will pay only the reduced penalty that applies to voluntary corrections under the IRS’s Employee Plans Compliance Resolution System (EPCRS).
On December 31, 2012, the IRS released Revenue Procedure 2013-12 (the Revenue Procedure), which expanded EPCRS provisions to permit 403(b) plan sponsors that failed to timely adopt a written plan document by December 31, 2009, to make corrections under the Voluntary Correction Program (VCP) under EPCRS. The VCP allows plan sponsors to voluntarily disclose plan errors, submit proposed corrections and pay a limited fee to the IRS. For non-timely adopters that submit their VCP application no later than December 31, 2013, the IRS has reduced the VCP compliance fee by 50 percent, provided that the plan document failure is the only error included in the submission. Prior to the Revenue Procedure, there was no relief available under EPCRS for 403(b) plan sponsors that had failed to timely adopt a written plan document.
Special Relief for 403(b) Plans Under Audit
The recent IRS announcement expanded this transitional relief to 403(b) plan sponsors that are audited or notified of a 403(b) plan audit between now and April 1, 2013. This relief previously was presumed unavailable to 403(b) plan sponsors under audit as the VCP program is generally unavailable for plans under audit.
Depending on the facts and circumstances in each case, the IRS may allow a 403(b) plan sponsor with a plan under audit to correct a failure to timely adopt a written plan document while paying the same reduced compliance fee applicable to 403(b) plan sponsors that correct document failures through VCP submissions. In other words, sponsors of audited 403(b) plans that failed to timely adopt a written plan document may be able to correct that failure and pay only 50 percent of the VCP fee, rather than the higher fee for corrections for plans under audit. This special transition relief for audited plans is available only until April 1. Plans not under audit can make use of the IRS VCP program at any time.
Compliance with 403(b)’s written plan requirement is essential to avoiding continuing exposure to costly audit resolution fees.