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GT Alert

Improved IRS Self-Correction Program for Qualified Plans Will Satisfy Enhanced ERISA White-Collar Crime Provisions

August 2002
By Jeffrey D. Mamorsky and Terry L. Moore, Greenberg Traurig, New York Office

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As a result of the establishment of the IRS Employee Plans Closing Agreement Program ("CAP") which imposes monetary sanctions on plan sponsor employers and trustees (in the case of multiemployer plans) for failure to operate retirement plans in accordance with their terms and the qualification requirements of the Internal Revenue Code ("Code"), IRS for the first time ever established several voluntary compliance self-correction programs that offer a means to avoid the imposition of monetary sanctions by IRS and the assurance that their retirement plans will not be disqualified for an operational or administrative error. These landmark programs allowing the correction of qualification failures have been set forth in a series of revenue procedures that have been consolidated in the IRS Employee Plans Compliance Resolution System ("EPCRS") which provides a comprehensive system for the correction of plan document and operational failures in order to retain a plan’s tax-favored benefits under Code Sections 401(a), 403(a) and 403(b) and avoid the imposition of monetary sanctions.

Jeffrey D. Mamorsky
“Revenue Procedure 2002-47 contains for the first time a formal recognition by the IRS that self-audits of retirement plan administrative practices and documents must be taken to avoid Audit CAP Monetary Sanctions.”

IRS Self-Correction Program

EPCRS underwent a major facelift in IRS Revenue Procedure 2001-17 that was discussed last year in our April, 2001 GT Alert "Avoidance of IRS Employee Plans Monetary Sanctions – 2001 Update." EPCRS, and in particular its self-correction program, were further improved by IRS on June 27, 2002 with the release of Revenue Procedure 2002-47 which updates the EPCRS program for correcting defects in qualified plans and section 403(b) arrangements.

Like the IRS determination letter process approving the form of the plan document (which is not required but nonetheless routinely sought by prudent plan sponsors), the IRS through issuance of an annual Revenue Procedure is encouraging plan sponsors to identify and correct failures that may have occurred in plan operations through its EPCRS program which is now elevated to the same level of importance as the determination letter process. Indeed, Revenue Procedure 2002-47 contains for the first time a formal recognition by the IRS that one of the factors to be considered in determining the amount of the Audit CAP monetary sanctions that are imposed on plan sponsor employers or trustees is the steps the plan sponsor takes to "identify failures that may have occurred" (i.e., a self-audit of administrative practices and procedures as well as plan documents).

Enhanced White-Collar Crime Penalty Provisions

This announcement by the IRS is particularly timely in view of the enactment of enhanced White-Collar Crime Penalty Provisions included in the Sarbanes-Oxley Accounting Reform and Investor Protection Act of 2002 (H.R. 3763) that (i) imposes oversight sanctions and disciplinary procedures on the performance of accountants, (ii) prohibits the performance of non-audit services (e.g., actuarial, management consulting, human resources and legal-type services) by accountants for audit clients, (iii) certification of financial reports by the principal executive or financial officer, (iv) imposes sanctions on corporate officers or any other person acting under their direction for allowing misleading information to appear on audited financial statements,1 (v) establishes a rule requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violations to the chief counsel or chief executive (or equivalent thereof) who needs to appropriately respond to the evidence adopting appropriate remedial measures or sanctions with respect to the violation,2 and (vi) amends ERISA Section 501 so as to increase from $5,000 to $100,000, or $500,000 in the case of a corporation (formerly $100,000) and imprisonment of up to 10 years (formerly 1 year) for willfully violating any ERISA reporting and disclosure provisions, including the financial statement requirements of ERISA Section 103(b).3 This could arise in the case of a certified financial statement of a qualified retirement plan where the auditor requires the employer or trustee to represent that the plan is operated pursuant to its terms and applicable laws. This representation, which appears as a footnote in every plan’s financial statement, may be inaccurate in the absence of a review of plan administration.

Although plan sponsors may employ experts for guidance in the drafting, administration and auditing of these plans, the IRS Revenue Procedure and Accounting Reform and Investor Protection Act of 2002 make it mandatory for employers and trustees to adopt internal control procedures that enable the plan sponsor to identify inconsistencies between administration and plan provisions and the Code’s qualification requirements in order to avoid IRS monetary sanctions and allow corporate officers to comply with the new financial statement and corporate governance requirements.

Although the IRS addressed this factor in prior Revenue Procedures, it was covered only in general terms. According to the Government Affairs Committee of the American Society of Pension Actuaries ("ASPA"), "by separately addressing the steps taken to identify failures that may have occurred, the IRS is not only attempting to reemphasize the importance of plans maintaining practices and procedures to ensure compliance with the qualified plan rules, but to specifically reward plan sponsors that regularly conduct internal compliance reviews of their plans. The relevance of this factor was implicit under the prior Revenue Procedures; the fact that the IRS has now listed it separately indicates its level of importance. Plan sponsors and their advisors should remember to assess this factor in negotiating the sanction under the Audit CAP."4 We agree wholeheartedly with ASPA. The expansion of the list of factors considered by IRS in determining the Audit CAP sanction to allow consideration of the steps that the plan sponsor took to "identify failures that may have occurred" is a formal recognition by the IRS that it behooves plan sponsors to undertake self-audits of administrative procedures and practices as well as documents.

Improvements to EPCRS

Unlike the previously released version of EPCRS (Rev. Proc. 2001-17), Rev. Proc. 2002-47 does not make sweeping changes to EPCRS. However, in addition to the factor discussed above, it does make several other substantive and procedural changes that continue to demonstrate the IRS’s commitment to continually improve EPCRS. The changes to EPCRS contained in Rev. Proc. 2002-47 become effective July 22, 2002. The most significant changes are highlighted below.

[1] Exceptions to Full Correction

Under Rev. Proc. 2001-17, a plan sponsor was not required to make a corrective distribution if the distribution (1) was $20 or less and (2) the reasonable direct costs of processing and delivering the distribution would exceed the amount of the distribution. Rev. Proc. 2002-47 increases the $20 amount to $50. Plan sponsors must continue to verify that the reasonable direct costs of processing and delivering the distribution will be $50 or, if less, the amount of the distribution.

Rev. Proc. 2002-47 also provides a new de minimis exception. Plan sponsors will no longer be required to seek a refund of overpayments made to a participant if the overpayment is $100 or less. Previously, plan sponsors were required to ask participants to return overpayments that involved very small amounts.

[2] Terminated Plans

EPCRS now expressly allows terminated plans to correct errors using VCP (voluntary correction with IRS approval). The ability to correct qualification failures in a terminated plan will come as welcome news to plan sponsors and participants because it provides a procedure for ensuring that distributions from a "defective" terminated plan remain eligible for favorable tax treatment, including a tax-free rollover. However, it is important to emphasize that VCP is not available if the plan or plan sponsor is "under examination." However, while the plan or plan sponsor is under examination, insignificant operational failures can be corrected under SCP and, if correction has been substantially completed before the plan or plan sponsor is under examination, significant operational failures can be corrected under SCP.5 According to the IRS, an Employee Plans examination also includes a case in which a plan sponsor has submitted a Form 5310 application for determination upon plan termination and the Employee Plans agent notifies the plan sponsor, or a representative, of possible qualification failures, whether or not the plan sponsor is officially notified of an "examination." This would include a case where, for example, a plan sponsor has applied for a determination letter on plan termination, and an Employee Plans agent notifies the plan sponsor that there are partial termination concerns requiring full vesting for affected participants.6 Accordingly, it is advisable to perform a self-audit on plan operations and identify and correct deficiencies prior to a Form 5310 submission to IRS on qualification on plan termination.

[3] Changes to Anonymous Submission Procedures

Rev. Proc. 2002-47 indefinitely extends the Anonymous Submission Procedure under VCP. Under Rev. Proc. 2001-17 the Anonymous Submission Procedure was scheduled to expire on December 31, 2002. In addition, four significant changes were made to the procedure: (1) Previously, only failures and correction methodologies other than those set forth in Appendices A and B of Rev. Proc. 2001-17 were eligible for Anonymous Submission. Rev. Proc. 2002-47 expands the Anonymous Submission Procedure by allowing correction of any error using any methodology allowed under VCP. (2) Under Rev. Proc. 2002-47, VCGroup filings may now use the Anonymous Submission Procedure. Before, this program was not available to VCGroup. (3) Under Rev. Proc. 2001-17, a plan was not eligible for Anonymous Submission with respect to a failure that was previously submitted under that procedure during the preceding two years. This two-year restriction was deleted under Rev. Proc. 2002-47. (4) A new requirement under Rev. Proc. 2002-47 is that the plan sponsor’s state of domicile must be disclosed in the Anonymous Submission.

[4] VCGroup Procedures

Rev. Proc. 2002-47 expands the VCGroup procedures to permit eligible organizations, such as master and prototype plan sponsors, third party administrators, or insurance companies, to submit operational and plan document failures in a single submission package. Previously, only a master and prototype plan sponsor could file under VCGroup for a plan document failure. Similarly, only insurance companies and third-party administrators were eligible to file under VCGroup for operational failures. Rev. Proc. 2002-47 eliminates this distinction and allows all eligible organizations to file under VCGroup for either plan document failures or operational failures. Under Rev. Proc. 2001-17, a master and prototype sponsor was not eligible to submit an application unless its documents had either received a GUST opinion letter, or had received a TRA ’86 letter and had been timely submitted for a GUST letter. Rev. Proc. 2002-47 dropped that requirement for master or prototype sponsors. Finally, the consistency requirement, requiring that the same correction methodology be applied to correct all errors of the same type occurring in the same plan year, applies on a plan-by-plan basis rather than a per-submission basis. This approach allows a master or prototype sponsor to include 20 or more plans having the same defect in a single submission, but it does not limit each affected plan sponsor’s correction options by requiring uniform corrections between affected plans, so long as a minimum of 20 plans implement a proper correction. As noted above, VCGroup filings can now be made using the Anonymous Submission Procedure. These improvements to the VCGroup Procedures are likely to promote the self-discovery of defects by service providers and encourage use of the procedure.

[5] Transferred Assets in Merger or Other Corporate Transactions

The general rule under SCP is that a significant operational failure must be corrected by the end of the second plan year following the plan year in which it occurred. Rev. Proc. 2001-17 extended this two-year self-correction period where an existing plan accepts a transfer of plan assets or effects a plan merger in connection with a corporate merger, acquisition, or similar transaction (referred to as an "Employer Transaction") and the assets transferred cause a qualification failure in the transferee/merged plan. In such a case, the self-correction period ends on the last day of the first plan year beginning after the transaction (even though the two-year self-correction period might have ended earlier). Rev. Proc. 2002-47 clarifies that these rules also apply to a plan assumed by a plan sponsor as part of an Employer Transaction (i.e. where the acquiring company adopts the target company’s plan without merging in or transferring over the assets. Accordingly, as a result of this improvement made by Rev. Proc. 2002-47 under SCP where a plan sponsor assumes a plan in connection with a Employer Transaction, the self-correction period for a significant operational failure does not end with respect to any defects involving the assumed plan until the last day of the first plan year beginning after the Employer Transaction.

To be eligible for SCP, a plan sponsor must have procedures and policies in place to promote and facilitate compliance. In connection with transferred assets or assumed plans, Rev. Proc. 2002-47 clarifies that a plan sponsor must have procedures and policies in place by the end of the first plan year that begins after the Employer Transaction occurs. The VCP fee is based on the number of participants and amount of plan assets as shown in the most recent IRS Form 5500. When plan assets are transferred as part of an Employer Transaction, the receiving or transferee plan frequently prefers that the fee be based on the number of participants or plan assets of the generally smaller transferor plan. Rev. Proc. 2002-47 continues to allow the fee to be based on the transferor plan but only if there are no new incidents of failures that occur after the second plan year that begins after the Employer Transaction.

[6] Favorable Letter

Certain EPCRS programs (SCP, if correcting significant errors, and VCO) require a plan to have a favorable letter as a prerequisite to correcting a compliance error. Rev. Proc. 2002-47 updates the definition of a favorable letter to include the recently past and upcoming GUST filing deadlines. Essentially, a favorable letter means that a plan has a GUST determination letter or has a TRA ’86 letter and either has timely filed for a GUST determination letter (generally by February 28, 2002 for individually-designed plans), or qualifies for an extension of the GUST filing deadline (e.g., master and prototype plans, or plans directly affected by September 11).

[7] Additional Relief with the Fiduciary Audit® Operational Review

Circumstances often arise where plan sponsors are unable to make corrections under SCP or submit them to the IRS for approval under VCP. This would occur, for example, in the case of significant defects in excess of two years or plan document corrections that may not be covered under SCP. Also, this could be the case in a merger/acquisition transaction where there is not enough time to correct document and operational failures and submit corrections to the IRS for approval under VCP. In these cases, the Fiduciary Audit® Operational Review, which is exclusively available through Greenberg Traurig, enables plan sponsors to qualify for indemnification against IRS liability (CAP monetary sanctions) and the cost of corrections required by the IRS under the Fiduciary Audit® Insurance Program offered by the Gulf Insurance Group and other leading insurers.


© 2002 Greenberg Traurig


1 See, e.g., H.R. 3763 that declares it to be unlawful "for any officer . . . or any person acting under the direction thereof to take any action to . . . mislead any independent public or certified accountant engaged in the performance of an audit of financial statements" (Section 303) and imposes civil penalties and imprisonment of up to 10 years for anyone who "knowingly makes a false entry in any record, document . . . with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States (Section 802).

2 See Section 307 of H.R. 3763 (Rules of Professional Responsibility for Attorneys).

3 See Title 1X of H.R. 3763 (White-Collar Crime Penalty Enhancements), Section 904 (Criminal Penalties for Violations of ERISA).

4 ASPA ASAP, July 9, 2002 No. 02-16.

5 Rev. Proc. 2002-47, Section 4.02(2).

6 See Rev. Proc. 2002-45, Section 5.03(3).

Additional Information:

For more information, please review our Executive Compensation & Employee Benefits Group description, or feel free to contact one of our attorneys.

This GT ALERT is issued for general purposes only and is not intended to be construed or used as legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs. The Firm’s responsive approach to client service often cuts across legal subject matter, applying the right experience and resources to provide cost-effective solutions.