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GT Alert

IRS Makes It Easier to Avoid Monetary Sanctions If the Plan Sponsor Has Established Internal Control Procedures

July 2003
By Jeffrey D. Mamorsky and Terry L. Moore, Greenberg Traurig, New York

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In its latest guidance on the Employee Plans Compliance Resolution System ("EPCRS"), the IRS makes it easier for employer plan sponsors and trustees (in the case of multiemployer plans) to self-correct operational errors that occur in the administration of their plans and avoid payment of IRS monetary sanctions provided that they have established internal control procedures to ensure that the plan is operated properly (Revenue Procedure 2003-44, released June 5, 2003). EPCRS is a comprehensive system of correction programs established by the IRS for employers and trustees who sponsor retirement plans to identify and correct operational errors so that their plans can continue to provide retirement benefits on a tax-favored basis.

Jeffrey Mamorsky
"The IRS makes it easier for employer plan sponsors and trustees to self-correct operational errors that occur in the administration of their plan."

Revenue Procedure 2003-44 updates and substantially modifies the previous Revenue Procedure 2002-47, which made several substantive and procedural changes to EPCRS, including the ability to correct qualification failures in a terminated plan and the extension of the self-correction period for a plan assumed in a merger or other corporate transaction to the last day of the first plan year beginning after the transaction (discussed in the August 2002 GT Alert "Improved IRS Self-Correction Program for Qualified Plans Will Satisfy Enhanced ERISA White-Collar Crime Provisions"). The annual issuance of an almost 100-page Revenue Procedure on this subject demonstrates the importance of self-correction and IRS’ commitment to continually improve EPCRS.

The new Revenue Procedure re-emphasizes that the steps a plan sponsor employer takes to identify and correct errors that may occur in the administration of a qualified requirement plan is now one of the most important factors to be considered in determining the amount of monetary sanctions that are imposed on plan sponsors for failure to operate retirement plans in accordance with their terms and the qualification requirements of the Internal Revenue Code ("Code"). Under Rev. Proc. 2003-44, generally a plan sponsor that has established compliance practices and procedures may correct operational errors without paying any fee or sanction. In order to self-correct, the plan sponsor must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with the applicable Code requirements.

However, if an operational error is identified during an IRS audit, the plan sponsor must correct the error and pay a negotiated sanction. The amount of the sanction is based on eight factors of which the first three are (1) the steps taken by the plan sponsor to ensure that the plan had no failures, (2) the steps taken to identify failures that may have occurred and (3) the extent to which correction had progressed before the IRS audit began (Section 14.02 of Rev. Proc. 2003-44). What this means is that a plan sponsor must have internal control procedures in place to monitor the operation of its retirement plan and identify operational errors. Such internal control procedures serve two purposes under EPCRS: (1) to qualify under EPCRS for self-correction prior to an IRS audit and (2) to mitigate and, in some cases, completely avoid the imposition of a monetary sanction if the IRS discovers an error not identified by the plan sponsor’s internal control procedures.

ERISA White-Collar Crime Penalty Provisions

The importance of internal control procedures is not limited to the IRS program but also applies to the enhanced ERISA White-Collar Crime Penalty Provisions included in the Sarbanes-Oxley Accounting Reform and Investor Protection Act of 2002 that includes penalties for violations of ERISA that could arise in the case of a certified financial statement of a qualified retirement plan where the auditor requires the employer plan sponsor to represent that the plan has been operated pursuant its terms and applicable law. The representation is included in the plan’s certified financial statement as a footnote which may be false if the plan sponsor does not establish internal control procedures to identify and correct errors in plan operations.

Highlights of the Simplification Provisions of Revenue Procedure 2003-44

1. Consolidation of All Voluntary Correction Procedures ("VCP")

All of EPCRS’ voluntary correction procedures were consolidated into a single Voluntary Correction Program thereby eliminating all other special procedures that were contained in the prior revenue procedure.

2. All VCP Submissions Under a Fixed Fee Schedule.

The IRS significantly reduced fees for all VCP requests, including anonymous and nonamender submissions, and now require payment of a fixed fee with the initial VCP submission. The fee is generally based on the number of participants/employees in the plan, as shown below:

Number of participants/employees Fee
20 or fewer $ 750
21 to 50 $ 1,000
51 to 100 $ 2,500
101 to 500 $ 5,000
501 to 1,000 $ 8,000
1,001 to 5,000 $ 15,000
5,001 to 10,000 $ 20,000
Over 10,000 $ 25,000

For nonamenders that apply for VCP within a one-year period following the expiration of the plan’s remedial amendment period, the VCP fee is reduced by 50%.

The fee for Group Submissions is based on the number of plans affected by the failures but the fee cannot exceed $50,000 for all plans:

Number of Plans Fee
First 20 plans $10,000
Each additional plan $ 250

The fee for SEPs and SIMPLE IRA Plans is $500.

Since Rev. Proc. 2003-44 does not provide for a reduction in VCP fees for egregious failures, such fee is not included in the VCP fixed fee schedule. In these cases, the VCP fee is still the greater of the fee under the fixed schedule or an amount equal to the negotiated percentage of the maximum payment amount, not to exceed 40% of such amount.

3. Plans Awaiting a Determination Letter May Not Be Eligible for VCP

A change in the revenue procedure makes it more difficult to use VCP if a determination letter application has been submitted. A plan will not be eligible for VCP if notice of a failure has been given during the determination letter application process even if no official notice of examination has yet been provided.

4. Revised Factors Used in Determining the Monetary Sanction Under Audit CAP.

By removing a factor contained in the prior revenue procedure that took into consideration the VCP fee, the revenue procedure makes it clear that the maximum payment amount is the only basis for negotiating the monetary sanction under Audit CAP. The revenue procedure added a new factor for qualified plans where a failure is discovered during the determination letter application process.

5. Guidance Provided for EGTRRA Nonamenders.

EPCRS is now available to correct qualified plans that have failed to adopt timely good faith plan amendments for the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). Because the IRS has not yet opened the determination letter program for EGTRRA amendments (current determination letter applications are being reviewed by the IRS for the GUST amendments only, even if the plan document contains the EGTRRA amendments), the IRS will issue a compliance statement under VCP instead of an IRS determination letter on the EGTRRA amendments. However, in the case of a terminated plan that was not amended timely for EGTRRA, the IRS will issue a compliance statement and a determination letter.

6. VCP May Be Used to Correct Failures in a Terminated Plan.

The revenue procedure clarifies that failures occurring in a terminated plan can still be corrected under VCP whether or not the trust is still in existence.

7. EPCRS Now Applies to SIMPLE IRA Plans and Contains Correction Methods and Reporting Instructions for SEPs and SIMPLE IRA Plans.

EPCRS was expanded to apply to SIMPLE IRA Plans. Appendices A and B of Rev. Proc. 2003-44 have been expanded to apply the correction methodology and examples of correction contained in the Appendices to SEPs and SIMPLE IRA Plans, further enhancing the IRS commitment to provide guidance on all types of plan corrections.

8. New Appendix D.

A new appendix was added to the revenue procedure containing sample formats to assist plan sponsors in preparing VCP submissions. The revenue procedure now contains a sample format that can be used for all VCP submissions other than nonamender cases as well as a sample format applicable only to nonamender cases.

9. The Anonymous and Group Submissions Procedures Expanded.

The Anonymous and the new simplified Group Submission Procedures can now be used for any VCP submission to IRS including SEPs and SIMPLE IRA Plans.

10. Simplification of the Group Submission Procedure.

The POA requirement for Group Submissions for each plan affected by the failure has been eliminated. Instead the submitting organization must provide notice of the submission to each affected plan and certify that each plan received the notice. An affected plan can then opt out of the Group Submission.

11. Plan Loans Treated as Deemed Distributions Must Be Reported on Form 1099-R

The correction methodology for plan loan failures that are treated as deemed distributions under Code §72(p) must be reported on Form 1099-R for the year of correction.

Additional Relief with the Fiduciary Audit® Operational Review

Circumstances often arise where plan sponsors are unable to make corrections under the Self-Correction Program ("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 Protection Program offered by the Gulf Insurance Group and other leading insurers.

The Fiduciary Audit® Operational Review is particularly important in view of the end of the GUST amendment period which will allow the IRS to shift its focus from the GUST determination letter program to its plan audit program. Moreover, now that Rev. Proc. 2003-44 clarifies that any determination letter submission may be considered "Under Examination" and thus ineligible for VCP, if the IRS discovers an actual or potential qualification failure during the determination letter process, the plan sponsor would have to correct the defect(s) under Audit CAP which requires the payment of a negotiated and often substantial monetary sanction. Accordingly, it is extremely important that plan documents and operation be thoroughly reviewed before the determination letter application is submitted. The Fiduciary Audit® Operational Review provides a cost-effective means of self-review, sanction avoidance and indemnification against IRS sanctions and IRS-required corrections.


© 2003 Greenberg Traurig

Additional Information:

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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.