Voluntary compliance programs for qualified retirement plans.

• Author: Horvath, David S.

Favorable tax treatment is available for retirement plans that meet statutory qualification requirements. In the 22 years since ERISA was enacted, these qualification rules have become increasingly technical. Although plan sponsors are generally careful to keep plan documents up to date for new qualification requirements, many sponsors and their advisers have found instances in which their plans are not in compliance with one or more qualification requirements.

Prior to the introduction of voluntary compliance programs by the IRS in the early 1990s, the unfortunate result of operational defects was possible disqualification of the plan's tax-favored status. Pardy because plan disqualification negatively affects both highly compensated and rank-and-file employees, disqualification was applied only in the most extreme cases.

To encourage voluntary compliance by plan sponsors and provide greater uniformity of enforcement among Service key districts, voluntary compliance programs were started. These programs were the Closing Agreement Program (CAP) in 1990, Administrative Policy Regarding Sanctions (APRS) in 1991 and Voluntary Compliance Resolution (VCR) in 1992. Although the costs, procedures and types of eligible defects vary under each program, the overall goals include preserving an impaired plan's qualified status, correcting the defects to make affected participants "whole" and reasonably ensuring that the same or similar defects no longer occur in a plan's operation.

These programs were recently modified and consolidated in Rev. Proc. 98-22, effective Sept. 1, 1998.

Each program covered under Rev. Proc. 98-22 has different goals, requirements and results. In some cases, a plan sponsor has to follow the appropriate program outlined in Rev. Proc. 98-22, based on its ability to meet eligibility requirements. However, in some cases, different programs provide more favorable results in different areas. While the correction of a defect is required in each program, the sanction or required fee may differ greatly, depending on which program is chosen. Therefore, practitioners should be familiar with each program, to be able to place their client's plan under the program that provides the best opportunity for the results desired.

The only program that does not require filing with the IRS is Administrative Policy Regarding Self-Correction (APRSC). (This program was formerly known as APRS.) APRSC offers relief from disqualification only for...