Earlier this summer, the Internal Revenue Service (IRS) surprised the retirement plan world when it announced a new approach for narrowing the universe of plans seemingly worthy of its investigatory and audit resources. If your organization receives a letter under this new program, what will you do? Will you be prepared to respond? What if the answer is no?
Background. For the last several years, both the IRS and Department of Labor (DOL) have acknowledged a limitation on the manpower and resources available for all of the examinations they’d otherwise like to perform. The IRS has been particularly proactive in countering that limitation by providing additional resources for self-correction. In essence, the IRS has already created an atmosphere that encourages plan sponsors to be proactive and self-correct errors discovered upon self-examination.
IRS Announcement. A June 3 announcement from the IRS went one step further. It is common for the IRS to notify a plan sponsor by letter that its retirement plan was selected for examination (which we commonly consider to be an “audit”). Under a new pilot program, though, the letter will also provide the employer a 90-day window to review the plan’s document and operations for compliance. The IRS was transparent with its goal for the program: “to reduce taxpayer burden and reduce the amount of time spent on retirement plan examinations.”
How to Respond. Is it okay to ignore the letter? Um, no. If a plan sponsor doesn’t respond to the letter within 90 days, the IRS will schedule its exam.
Action Steps. With the baseline expectation of a timely response in mind, a plan sponsor should plan on each of the following steps:
- Calendar a response for a date that ensures a submission within the window provided.
- Conduct an internal review for consistency between the plan document and plan operations.
- Document the review process, including the specific plan provisions and corresponding operational procedures that received consideration.
- With respect to any mistakes, first review IRS guidance – found within the 140-page Revenue Procedure 2021-30 – to determine if they are eligible for self-correction. Correct those mistakes that are eligible. For those ineligible for self-correction, plan to request a closing agreement from the IRS and prepare to pay the corresponding fee.
- Roll all of this into a detailed and timely response to the IRS.
Where to Start? An internal review of plan operations can be pretty daunting. The IRS’s announcement is incredibly broad and completely devoid of references to common errors or specific areas of focus. We anticipate that diligent plan sponsors will begin with a provision-by-provision review of the plan document or adoption agreement, much like the plan design review that occurs within a recordkeeper transition. Following that detailed review, we recommend a separate review of the common mistakes the IRS has identified on its website. And of course, each potential correction requires independent evaluation for self-correction eligibility. QPA has the resources and expertise to help clients through all of those steps.
Closing Thoughts. Early this summer, my 12-year-old struggled to hit the curveball. Thankfully, 12-year-old pitchers are fairly predictable. They tip their pitches, either by how they fiddle with the grip in the glove or by throwing it when ahead in a two-strike count. Fortunately, he learned to anticipate those revealing signals and found success through preparation.
Although some had a negative reaction to the IRS’s announcements, we appreciate that it has again tipped its pitch. The IRS had already provided a list of common mistakes, fix-it guides for common mistakes, and a 140-page correction guide. Plan sponsors that embrace those resources and appreciate the ability to avoid a full audit with strong internal review will be able to sit back on the curveball and calmly knock this process out of the park.
We hope you’ll join our Fiduciary 15 webinar for an expanded discussion on the steps and common mistakes identified above. We’ll use that time to put you in a better position to be calm in the face of a letter from the IRS.