IRS New Compliance Pilot Program – What Plan Sponsors Need to Know

By: Sherry P. Porter

While most of us are aware that many governmental agencies are lacking staff and resources to fulfill their stated goals, the IRS launched a pilot program in June 2022 which puts much of the compliance review for retirement plans back on the plan sponsor if its plan is selected for this pre-audit pilot program.

The IRS will notify a plan sponsor that it has a 90 day window to review its plan documentation and operations to determine if they meet current tax law requirements.  If the plan sponsor does not reply in a timely manner, the IRS will schedule an exam of that plan.  The IRS normally notifies the plan sponsor when an employee benefit plan is selected for audit and lists all of the plan documentation that the IRS agent will need to review.  The audit process is often time consuming and expensive for the plan sponsor. The program does not contain many details at this point as to what types of plans they will be selecting for this program or details about the focus of review.

The pilot program puts the work back on the plan sponsor to determine compliance, not only in form, but in operation of the plan.  If the plan sponsor’s review reveals errors with regard to the plan document or operations, the plan sponsor may be able to correct the errors through the IRS’s Employee Plans Compliance Resolution System found in Revenue Procedure 2021-30.  This correction program contains guidance for self-correcting many plan errors.  If the errors are not eligible for self-correction, the plan sponsor may enter into a closing agreement with the IRS to correct the errors and pay a (hopefully) reduced sanction to the IRS.

The IRS will review the documentation provided by the plan sponsor and if it agrees with the conclusions, it will issue a closing letter or conduct a limited scope or full scope examination.  The goal of the program is to reduce taxpayer burden and time spent on examinations.  The IRS will review the program at the end of the pilot to determine if it was effective.  If it finds that the program was effective, it may become a permanent program.

What should plan sponsors do if they receive a letter from the IRS under this program?  Contact your legal counsel and plan providers immediately so that you can perform the review and analysis of your plan provisions and operations in a timely manner and correct any issues that are discovered during the review. You may also wish to conduct periodic self-audits of your plan so that you can identify any potential issues and correct them prior to any inquiries from the IRS or Department of Labor.

Sherry P. Porter

Sherry Porter has more than twenty years of experience in the employee benefits field.  She began her legal career as an investigator for the U.S. Department of Labor Employee Benefits Security Administration, where she conducted investigations to ensure compliance with ERISA and related laws and negotiated compliance agreements to correct violations.  Ms. Porter regularly advises clients on legislation affecting employee benefit plans, such as HIPAA privacy and security rules and the Patient Protection and... Read More