We want to share with you some recent informal developments from the Internal Revenue Service that could be concerning for sponsors of retirement plans.

VCP Rumors – A report recently emerged that the IRS is considering a major shift in the way in which Voluntary Compliance Program (VCP) submissions are processed. VCP allows sponsors of many types of retirement plans (profit sharing, money purchase pension, defined benefit, 401(k), 403(b) and other types) to voluntarily correct plan document and operational failures. While the submission can be made on an anonymous basis, many sponsors decide not to file anonymously because the IRS has historically taken the position that a plan that is the subject of a non-anonymous VCP submission will generally not be audited while the VCP submission is pending.

According to the initial report, an IRS "whistleblower" informed the American Retirement Association that the IRS intended to adopt a policy that would result in a plan being automatically sent to the examination group if information requested by the IRS on a pending VCP submission was not provided within 21 days. The IRS later clarified its position, as reported in a follow-up article in napa.net, and expressed the view that such a referral is permitted under existing policies, but that those policies simply have not been rigorously enforced. Specifically, the Service believes that when the sponsor is either unresponsive or the IRS and the sponsor are unable to agree on a resolution, the IRS can, and potentially should, be referring the cases to examination.

Whether and when any change of this type may take effect is not clear. But given the IRS view that referrals are permitted under existing policies, a shift could apply to existing VCP submissions as well as newly-filed submissions. Sponsors of plans considering new VCP submissions need to take this potential shift into account when making strategic decisions about whether and how to file a VCP submission (vs. for example use of self-correction), must be prepared to timely respond to IRS requests for additional information, which often means anticipating possible follow-up requests, and must be prepared to take into account the risk of being unable to resolve a submission.

Plan Document Retention Policy – The IRS and Treasury have long required various types of tax-favored retirement plans to have a written plan document that complies with the requirements of the Internal Revenue Code. In the case of a 401(k) plan or cafeteria (125) plan, the IRS has also long taken the position that no pre-tax amounts can be withheld before the plan has been adopted.

In December, an informal Generic Legal Advice Memorandum was issued that reiterates the sponsor’s responsibility for maintaining plan documents that evidence a plan’s timely adoption, amendment and/or restatement. The memo was issued in response to a 2018 case in which the Tax Court made a factual determination that a plan had been adopted, even though only an unexecuted copy could be produced. In the memo, the IRS notes that this was an unusual scenario and that "it is appropriate for IRS exam agents and others to pursue plan disqualification if a signed plan document cannot be produced by the taxpayer."

While this position is not new, we have noticed over the last ten years or so an increased emphasis by the IRS on being able to produce historic, signed written plan documents, particularly when filing determination letter requests. For example, the IRS has been demanding evidence of prior timely adoption and amendments of all plans merged into the plan that is the subject of the filing.

The Bottom Line – Both of these issues suggest shifts in how the IRS and Treasury are dealing with retirement plan problems. It is an unfortunate by-product of increasingly complex laws that mistakes of one sort or another happen from time to time. In our experience, the IRS remains willing to work with plan sponsors to correct issues and avoid plan disqualification, although the continued increase in the number of plans utilizing VCP is causing the IRS to consider changes. As a result, a premium has been placed on careful and experienced planning, judicious use of voluntary (IRS and DOL) and self-correction programs, and routine operational reviews to help limit the liability of plan sponsors and fiduciaries.