HIGHER SANCTIONS IN FUTURE IN IRS’S UPDATE OF PLAN CORRECTION PROCEDURES?

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 The Internal Revenue Service released Revenue Procedure 2016-51, the fully updated Employee Plans Compliance Resolution System, Sept. 29, incorporating many of the changes that have been made since the last EPCRS revenue procedure in 2013. 

“Rev. Proc. 2016-51 still lacks many of the enhancements that practitioners have been requesting for years--such as the ability to self-correct basic loan failures and guidance on properly correcting safe harbor plan failures,” Alison J. Cohen, an attorney with Ferenczy Benefits Law Center LLP, in Atlanta, told Bloomberg BNA Oct. 6. 

Rev. Proc. 2016-51 largely just removes all references to the now eviscerated determination letter program and incorporates Revenue Procedures 2015-27 and 2015-28 (the previously issued patches to Rev. Proc. 2013-12), Cohen said. 

Higher Sanctions for Egregious Failures?

Cohen said one interesting change in language under Rev. Proc. 2016-51 comes from Section 4.10 (formerly 4.11) regarding situations filed under the Voluntary Correction Program (VCP) that the IRS determines are “egregious failures.” 

The VCP allows plan sponsors to pay a fee to correct a plan failure before it has been audited. These failures include covering only highly compensated employees in a plan, providing benefits to HCEs greatly in excess of the benefit limits, and providing greater benefits to an employer’s owner under a “purported” collective bargaining agreement that has not been bargained in good faith, Cohen said. 

Normally, when a practitioner files for a client under VCP, there is a set user fee that is based on the type of problem the plan experienced and the number of participants.  Under this new language, however, the IRS has reserved “the right to impose a sanction that may be larger than the user fee” for any submission based on its belief that there was an action taken that was knowingly a failure and predominantly benefited highly compensated employees, she said. 

“This change in language, while subtle, indicates a stronger willingness by the IRS to break with the tradition of sticking to just the VCP fees and may now start assessing additional sanctions.  To date, our firm has only heard of one such case receiving such a sanction, but there may be a need to caution clients considering a VCP filing when there are knowing failures that significantly benefitted HCEs.  If such a policy shift becomes widely used by the IRS, there may be a reluctance by plan sponsors and practitioners to use the VCP program.  We certainly hope this is not the IRS’s intention,” Cohen said. 

Other Changes

● Determination Letters. No more determination letter applications for plan amendments. When plan sponsors correct a qualification failure that includes a plan amendment, they can no longer submit a determination letter. However, determination letters can still be submitted for initial plan qualification and qualification upon plan termination. 

● Fees. After 2016, the VCP fees will be found in the IRS revenue procedure that covers user fees, rather than in the EPCRS revenue procedure. 

● Self Correction. For the Self-Correction Program (SCP), which may be used without IRS approval to correct both insignificant and significant operational failures, a determination letter doesn’t have to be current to satisfy the favorable letter requirement for individually designed plans. 

● Correction on Audit. For the Audit CAP program, which is for correction of all failures found on examination that have not been corrected through SCP or VCP, the sanction will no longer be a negotiated percentage of the maximum payment amount, but instead will be determined based on the facts and circumstances, and will not be less than the VCP user fee applicable to the plan. 

● Forms. Beginning Jan. 1, 2017, IRS will only supply model VCP forms through its website and will no longer include Appendix C model forms in the EPCRS revenue procedure. 

The new EPCRS provisions are effective Jan. 1, 2017. (See related story, IRS Updates Correction Programs for Determination Letter Changes).

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