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Thelen Reid Brown Raysman & Steiner LLP
On January 8, 1997, the IRS announced a new administrative policy giving sponsors of tax-qualified retirement plans greatly expanded powers to cure plan operational problems without IRS involvement. The new policy, known as the Administrative Policy Regarding Self-Correction (APRSC) replaces the old Administrative Policy Regarding Sanctions (APRS) which had been in effect since 1991. APRS had been frequently criticized as too narrow, because it permitted self correction for only isolated insignificant defects, and too vague, because it gave little guidance on what constituted an isolated or insignificant defect.
What Is the New Policy?
APRSC is a grant of broad discretion to IRS district offices to approve certain corrections previously made by plan sponsors and discovered upon later audit. District offices may now approve a plan sponsor's cure of significant operational defects if the cure was made any time before the end of the plan year following the plan year in which the defect arose. A plan sponsor's cure of insignificant defects may be accepted if the cure was made at any time prior to the commencement of an audit. In general, for most plans, the only defects for which APRSC is unavailable are those that can only be cured by a plan amendment. For example, a plan which has not been timely amended to comply with a change in the law would not be eligible for APRSC. Similarly, a plan which fails the coverage test because its demographics have changed could only be fixed by plan amendment and would also not be eligible for APRSC. With one exception, the new program also applies to 403(b) arrangements maintained by tax exempt or governmental entities. A 403(b) problem that would result solely in income inclusion for affected participants would not be eligible for APRSC. APRSC is also not available for exclusive benefit violations relating to the misuse or diversion of plan assets.
Are There Other Eligibility Requirements that Must Be Met?
To be eligible for APRSC, a plan must have established practices and procedures reasonably designed to promote overall compliance with the Internal Revenue Code. Although the procedures may be formal or informal, they must have been routinely followed. Some uncertainties will still remain. If a defect is discovered more than one plan year later, the sponsor must decide whether the defect is insignificant because significant defects would not be eligible for APRSC (but would still be eligible for one of the other IRS programs such as the Voluntary Compliance Resolution Program (VCR) or the Voluntary Closing Agreement Program (Walk-in CAP)). Whether a defect is significant will depend on the facts and circumstances. The IRS has identified several factors that will be taken into account such as: (1) the number of violations (a single violation may include more than one participant); (2) the percentage of plan assets and contributions involved; (3) the number of years involved; (4) the percentage of participants affected; and (5) the reason for the violations. No one factor will be determinative in deciding whether a defect is significant.
What Must Be Done to Cure an Operational Problem?
To cure a defect under APRSC, the plan sponsor must fully correct all violations for all years. The correction method should be one which puts all plan participants and the plan in the same position they would have been in if the defect had not occurred.
What Should Plan Sponsors Do?
This new policy places a premium on early detection of errors. Almost any operational error can now be cured if timely discovered. This suggests that plan sponsors should undertake regular self audits and cure any defects found as soon as possible. Because insignificant defects can be cured whenever they are found, self audits should not be limited solely to the immediately preceding plan year. The addition of APRSC to the existing programs such as VCR and Walk-in CAP is fully consistent with the IRS's announced intention to promote voluntary compliance. It suggests that a plan sponsor who routinely audits its plan and correct any errors will, in the future, run significantly less risk of plan disqualification. It also suggests, however, that plan sponsors who fail to conduct self audits or who fail to cure known defects will not be treated sympathetically if those defects are discovered upon plan audit by the Internal Revenue Service.
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©1997 Thelen Reid Brown Raysman & Steiner LLP
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