IRS Makes It Easier to Avoid Monetary Sanctions If the Plan Sponsor
Has Established Internal Control Procedures
By Jeffrey D. Mamorsky and
Terry L. Moore, Greenberg Traurig, New York
View or download the PDF version of this Alert
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.
|"The IRS makes it easier
for employer plan sponsors and trustees to self-correct
operational errors that occur in the administration of their
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
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
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
|20 or fewer
|21 to 50
|51 to 100
|101 to 500
|501 to 1,000
|1,001 to 5,000
|5,001 to 10,000
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
|First 20 plans
|Each additional plan
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
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
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
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
11. Plan Loans Treated as Deemed Distributions Must Be Reported on Form
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
For more information, please review our Executive Compensation
& Employee Benefits Group description, or feel free to contact one of our
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to be construed or used as legal advice. Greenberg Traurig attorneys provide
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