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Guest Article

Deloitte logo

(From the April 19, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Immediate Action May Preempt Selection in IRS Audit Initiative Targeting Large Retirement Plans

The IRS recently announced an audit initiative targeting retirement plans with at least 2,500 participants. Employers sponsoring such plans should immediately consider performing a compliance review to determine if qualification failures exist. If failures are found, consideration should be given to submitting an application under an IRS voluntary compliance program to voluntarily correct them. Doing so will preempt a costly IRS audit until the voluntary compliance process is complete. This program is in addition to the limited audit plan for selected industries begun on March 1st.

Employee Plans Team Audits

As a result of its recent restructuring, modernization, and reallocation of resource emphasis after the end of the GUST remedial amendment period, the IRS is launching a number of new audit initiatives. Among these are Employee Plans Team Audits (EPTAs), broad scope examinations that specifically target tax-qualified retirement plans with at least 2,500 participants. It is estimated that there currently are about 4,400 such plans in existence in the U.S. According to IRS public statements, research conducted during its restructuring revealed that the large plan segment of the pension plan market had very little audit activity. While larger plans represent only about one percent of all tax-qualified plans, they include about 48 million participants and have combined assets of approximately $2 trillion. In a pilot program that began in 2001, the IRS determined that when audits of these plans were conducted, significant issues were revealed. Based on these results, the IRS decided to make the pilot program a permanent feature of employee plan examinations in 2004.

The audit selection process for EPTAs includes assigning points for characteristics such as the number of plan participants, plan assets, and plan contribut ions. Points are then "weighted" on a basis that considers audit history, type of plan, and effect on plan participants. The EPTA process is also marked by its thoroughness. A plan selected for an EPTA audit will be audited by a team of IRS agents, each of whom has a particular area of expertise. According to IRS statements, the examination can last for up to two years. The amount of IRS resources brought on EPTA audits, combined with the complexity of the rules implicated by larger plans means there is a high likelihood that the IRS will find compliance issues.

Recommended Course of Action

We strongly urge employers whose plans fit the target criteria for an EPTA to review their plans as soon as possible to ascertain any qualification issues. If such issues are found, we further urge that the employer submit those issues under the Voluntary Correction Program, described in Rev. Proc. 2003-44, as soon as possible.

Under VCP, employers can voluntarily disclose qualification failures to the IRS and propose specific correction measures. The employer ultimately receives a compliance statement that provides specific assurances that the IRS considers the problems identified permanently resolved. Costs to the plan sponsor are limited to a specified filing fee based on the size of the plan and paid with the initial application, plus the cost of correction, if any.

Although the IRS offers other compliance programs for qualified plans, an important advantage of VCP is that the IRS indicates that they will not examine the plan while a VCP request is pending. Thus, filing a VCP request allows the employer to avoid the significant, long-term disruption that would likely result from being subject to an EPTA.

A VCP application can be filed on the basis of a single failure; there is no requirement that a plan sponsor disclose all known qualification failures, although additional failures can (subject to IRS discretion) be added to the pending application after the submission is filed. Therefore, we advise employers whose plans fit the target criteria for EPTA to submit VCP applications as soon as possible, even if only relatively minor compliance issues have been discovered.

If the IRS audits a plan and discovers compliance issues, they will allow the plan to avoid disqualification by entering a program known as Audit CAP. However, because Audit CAP results from an IRS examination and not from voluntarily identifying failures, the process may take much longer, require many more of the employer's resources, and ultimately result in significantly higher sanctions on the employer sponsoring the plan.

Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Tom Brisendine 202.879.5365, Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879.5608, J. D. Lutz 202.879.5366, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5324, Tom Veal 312.946.2595, or Deborah Walker 202.879.4955.

Copyright 2004, Deloitte.

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