In our fast-paced world, many retirement plans are devised and then often ignored. In extreme cases, plans are discarded without ever being updated. Some plan sponsors have failed to restate their plans for years or even decades. For many individuals, retirement plan accounts make up the bulk of their wealth. As the following discussion will illustrate, failure to protect this most valuable and important asset by keeping retirement plans fully compliant with applicable retirement plan laws can result in some very dire, costly, and unpredictable financial consequences.
Retirement plan laws always require that plans be updated for changes to the tax law. Prior to 2003, the IRS allowed plans to be restated periodically for changes to the tax law that occurred over the years. This results in a large and periodic restatement of the grand plan. However, since 2003 the IRS has required pension plan amendments for each new tax law resulting in more frequent “temporary amendments”. [For those of you interested in a more detailed discussion of these required interim amendments since 2003, please go to my questions answered at my Linked-In profile.] For many plans, the deadline for multiple restatements of these plans or provisional amendments has now expired. Current rules stipulate that plans that have not been redesigned to comply with a previously required restatement or provisional amendment will no longer be eligible by the applicable deadline.
In the worst case scenario, the IRS may demand that the plan be retroactively disqualified. If the IRS succeeds in disqualifying the plan, the plan sponsor’s tax deductions for contributions taken in the year of disqualification and in subsequent years will be voided. The taxes owed by the plan sponsor due to the absence of a previously claimed retirement plan deduction plus applicable interest and penalties can be substantial. In addition, program participants must treat as taxable income the value of their program account at the date of the disqualification. Taxes, interest and penalties to participants from the date of plan disqualification can be equally exorbitant. This would be a truly disastrous and harsh outcome for the employer plan sponsor and disqualified participant in the plan.
However, in most cases, the current IRS policy is to impose a monetary fine instead of the more severe penalty of plan disqualification. However, when the IRS raises these failures as a result of an audit, the penalties can be severe. Penalties can range from $2,500 to $80,000 depending on the failure involved and the size of the plan. It should be noted that in recent years, the IRS has stepped up its audits of retirement plans.
Here’s the Good News: How to Solve This Rising Problem
The IRS has a voluntary remediation program called a VCP (voluntary compliance program) to remedy the deficiencies of this plan document. The IRS position is that retirement plans can be requalified only by having the plan sponsor voluntarily come forward before an IRS audit by submitting a newly drafted arrears restatement and/or provisional amendment to the IRS in accordance with several highly detailed procedures and documentation as per the 2008-2008 Income Procedures. 50. After the IRS reviews and hopefully approves the newly drafted application and required documentation, the plan is deemed to be fully compliant with applicable law and the plan is retroactively taxable.
Instead of paying a steep monetary fine, submission of a VCP results in the payment of a filing fee to the IRS. Sometimes, if the offense is fairly limited, the filing fee can be as low as $375. (Remember, you will still have to pay for documentation services related to plan restatements and provisional amendments. However, these fees will be incurred under no circumstances to keep your plan fully compliant with the law.) The important point here is that the use of a VCP program avoids risk of disqualification of the plan or imposition of large monetary fines.
How We Can Help:
Many applications for VCP programs under the 2008-50 Revenue Procedures have been submitted by this office. This application along with any required plan restatements and provisional amendments should be carefully designed to ensure efficient negotiations and a successful outcome with the IRS.
Underline:
Plan sponsors must immediately and voluntarily move to correct plan deficiencies under the more taxpayer-friendly and less expensive VCP program before the IRS audits your plan. Once the IRS begins the audit, the VCP delivery strategy is no longer an option and your plan is subject to disqualification and/or severe monetary penalties.
Going forward, you should program with your plan advisor to ensure that your plan remains compliant with statutes regarding plan restatements, interim amendments and changing IRS filing requirements and deadlines. This will avoid having to deal with all these problems again in the future. In fact, the Revenue Procedure requires disclosure in the VCP application about what new procedures the plan sponsor will use to avoid this problem in the future.
Do not wait: