Employee Plans Compliance Resolution System
Genesis: The Very Beginning of Voluntary Compliance
The Insider's Story or the Whole Truth and Nothin' But the Truth
by Steve Leventhal

Several years ago I was at the annual conference of the American Society of Pension Actuaries (ASPA). At a seminar on the Employee Plans Compliance Resolution System (EPCRS) - the IRS's revenue procedure that coordinates all its voluntary compliance and administrative enforcement programs for qualified plans and 403(b) plans - a panelist stated that the whole idea for the EPCRS started with ASPA. He went on to imply that practitioners and plan sponsors owed a debt of gratitude to ASPA for causing the IRS to issue its first compliance programs in 1990-1991 that eventually led to the later issuance of the EPCRS; and that none of the later compliance programs issued in the 1990's would have happened without ASPA.

The Horror of It All

Well I love ASPA. I am a member of ASPA. I have spoken at several conferences and moderated panels at other run by ASPA. But this was more than I could bear in silence. I looked at the IRS representative on the panel and all I could see was the whites of her eyes. I had to raise my hand and say something because the pain was so unbearable.

I mustered all my humility and said politely that neither ASPA nor any other organization had anything to do with the first two IRS compliance programs for qualified plans that were issued in 1990 and 1991. I went on to say that ASPA's response to the first IRS programs - Employee Plans Closing Agreement Program (Audit CAP) in 1990 and the Administrative Policy Regarding Self-Correction (APRS) in 1991 - was much less than complimentary. In fact it was down right nasty. And lastly I said that these programs were initiated solely by the IRS, notably me when I was a Rulings Group Chief in the Employee Plans Division, and that the relationship between ASPA and the IRS was so contentious at that time that if ASPA had recommended anything it would have been rejected out of hand.

Author's note: To its credit, beginning around 1992 with the issuance of the Voluntary Compliance Resolution (VCR) Program, ASPA's input into voluntary compliance has been with the highest integrity and competence. Its ability to work creatively and pro-actively with the IRS, DOL, and PBGC, has been a model for the rest of the professional community. Moreover ASPA's involvement with Congress in pursuing fair, sensible, and workable pension legislation has been exemplary.

Disqualification and the Road Less Traveled

For years predating the issuance of the Employee Plans Closing Agreement Program (Audit CAP) 1/ in 1990 and the Administrative Policy Regarding Sanctions (APRS) 2/ in 1991, the IRS Employee Plans Division held onto its traditional position that if there was any form or operational plan failure, then the plan was not qualified as a technical matter; the plan should be disqualified; and the adverse tax consequences that flowed from disqualification to the employer, plan participant, and trust, should be assessed. To this day, that remains the IRS's technical/legal position even under the EPCRS.

What has changed since the issuance of the original Audit CAP in 1990 and APRS in 1991 and that continued and expanded under the current EPCRS is that disqualification can be avoided under a number of IRS compliance programs.

Reasons for Change at the National Office: The Real Story

Here is the background to the "how and why" employee plans voluntary compliance started. In the mid-1980's my Rulings Group in the IRS Employee Plans Division was handling many cases involving late amenders for TEFRA, DEFRA, and REA. These cases came to the National Office on technical advice where the taxpayers were seeking Code Sec. 7805(b) relief from retroactive plan disqualification. Other than those plans that were entitled to Code Sec.7805(b) relief, we disqualified them all-- the innocent as well as the guilty; the small and large employers; the poor and rich alike. We did not play favorites-- every plan was disqualified. We also disqualified plans with operational failures that came to the National Office for review. The same standard applied-- if the plan had an operational failure, it was disqualified. Again we did not play favorites.

However there came a time when I and others realized that it was truly crazy to disqualify plans when:

1. It was virtually impossible for plan administrators to understand the onslaught of pension legislation and keep their plans in perfect compliance.
2. It was impossible to comply with Treasury regulations that, in and of themselves, could not keep pace with changes in the law.
3. The IRS was unable to provide current guidance to plan administrators for TEFRA, DEFRA, and REA, and later TRA '86, so that they could administer their plans properly.

The attorneys in my group and I came to understand that the real-world ramifications of the technical position calling for disqualification was no longer realistic and quite often unfair. Disqualification often led to adverse tax consequences to the employer, participants, and trust, that were frequently totally disproportionate to the nature and type of plan failure(s).

Nonetheless, in view of the clear statutory framework under Code Secs. 401 (qualification), 402 (taxability), and 404 (deductions), and despite the administrative absurdity of disqualifying all plans with form or operational failures, the IRS's official policy stood firmly rooted in legislative concrete.

To understand why and how the IRS's first voluntary compliance (APRS) and administrative enforcement (Employee Plans Closing Agreement Program) programs came to pass, it is essential to see how the IRS key district offices (KDOs) 3/ were handling disqualifying failures discovered on audit and how this stood in stark contrast to how the IRS National Office 4/ were handling similar cases on technical advice.

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"Steve has been a great technical resource for my firm over the years. We rely on the books that he has authored as our bible for many technical issues, including the 403(b) plan rules. Steve's experience and understanding of the laws and regulations have been extremely valuable."

-- Gwen O'Connell, Certified Pension Consultant (CPC) and Qualified Pension Administrator (QPA); Principal of Gwen O'Connell Pension Consulting, Inc., in Eugene, OR; and Executive Committee Member, a Vice President and a member of the Board of Directors of the American Society of Pension Actuaries (ASPA), and the General Chair for ASPA's Education and Examination Committee. (Eugene, Oregon)