Beginning in June 2022, the IRS will be piloting a new pre-examination compliance program (June 3, 2022 Announcement) for retirement plans. As part of this pilot program, the IRS will be issuing notices to select companies sponsoring retirement plans, giving them a 90-day window to review plan documents and operations to ensure they are compliant before IRS review.

Purpose

The purpose of this pilot program is to encourage companies sponsoring retirement plans (i.e., plan sponsors) to take ownership of regularly reviewing their plan documents and operations to ensure they are compliant (with the help of their tax advisor, legal counsel and third-party plan administrator). The IRS intends for this to drive efficiencies in encouraging ongoing review and, if necessary, corrections. Such review will fall on plan sponsors and their advisors rather than on IRS agents to identify and recommend plan corrections, saving time spent on retirement plan examinations.

What happens if I am selected for this pilot?

1. Notice issued. The IRS will issue a notice stating its intent to review plan documentation after a 90-day window. The 90-day window provides a grace period to take any necessary steps to bring the plan into compliance.

2. Conduct a self-review. Don’t wait! Take steps immediately within the 90-day period to review your 1) plan document to ensure it is up-to-date on plan amendments (as published in the IRS Required Amendments List) and 2) plan operations to ensure the plan is being operated in accordance with the terms of the plan document.

3. Correct any errors. Should errors be identified, you may be eligible to self-correct them within the 90-day window. The IRS already has a program in place that details common plan errors and correction methods. The program is the Employee Plans Compliance Resolution System (EPCRS) outlined in Rev. Proc. 2021-30. If any errors are not available for self-correction, then a closing agreement can be requested from the IRS. Your advisers can assist you in determining whether errors are eligible for self-correction and, if not, filing an application with the IRS to request a closing agreement.

4. IRS review. After the 90-day period closes, the IRS will review your assessment of plan operations and documentation of any corrections. The IRS will then either issue a closing letter or conduct an examination, which could be limited or full scope in nature.

Where do I start?

If it has been a while since you have reviewed your plan document or plan operations, it is recommended to conduct a self-review, regardless of whether or not you receive a notice for this pilot pre-examination compliance program. First, you should ensure you understand the provisions of your plan document. Secondly, obtain records (e.g., payroll, participant elections, participant account data, compliance testing) to review. Walk through the plan process from start (when an employee enters the plan) to finish (when an account balance is distributed) and assess whether the plan provisions are being followed.

Information on the following common errors and some others can be found in  this guide: Top 10 retirement plan internal control pitfalls-and how to avoid them.

1. Failure to use the correct definition of plan compensation

2. Failure to timely deposit deferrals

3. Failure to timely apply forfeitures

4. Failure to include all eligible employees

5. Failure to properly administer automatic enrollment

A best practice is to review your plan document and operations on a regular and ongoing basis with your third-party administrator, legal counsel and tax adviser to help you assess compliance and identify any errors. This results in a greater likelihood to identify and thwart errors early, as well as avoiding the need to make corrections under pressure if you are selected for this or any other compliance review.

While it remains to be seen if the IRS will permanently adopt this compliance pilot, it demonstrates the IRS intent to have plan sponsors and their advisors take ownership of ongoing review and correction. Left uncorrected, plan document errors or operational errors can jeopardize a plan’s qualified status and the tax advantages under the plan. Reach out to your advisors with questions or if you need assistance reviewing your plan operations.