NEW PROGRAM ENCOURAGES VOLUNTARY CORRECTION OF PENSION PLAN DEFECTS.

Rev. Proc. 92-89

SECTION 1. PURPOSE

This revenue procedure establishes a temporary, experimental program to determine ways of enhancing voluntary compliance. In general, the program permits employers to voluntarily correct operational defects in their retirement plans and obtain a compliance statement which provides that the corrections are acceptable and that the Service will not pursue plan disqualification with respect to the operational violations identified in the statement. The program only applies for plans that received a determination letter under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the Tax Reform Act of 1984 (DEFRA), and the Retirement Equity Act of 1984 (REA).

SEC. 2. BACKGROUND

01 There are two types of defects that may affect the qualification of a plan. First, a plan's provisions may not satisfy the qualification requirements set forth in section 401(a) of the Internal Revenue Code. Second, a plan in which the provisions satisfy the qualification requirements of section 401(a) of the Code may nevertheless fail to operate in accordance with those qualification requirements.

02 With respect to form, a plan sponsor may obtain an advance determination letter stating that the plan, as written, is qualified. The plan sponsor may rely on that letter to the extent provided in Revenue Procedure 92-6, 1992-I I.R.B. 105.

03 With respect to operational defects, the Internal Revenue Service currently has two administrative programs:

(1) The Administrative Policy Regarding Sanctions (Administrative Policy), implemented on March 26, 1991, provides that although any violation of section 401(a) of the Code is disqualifying, certain operational defects may be so minor that it is not productive for the Service to pursue disqualification.

(2) The Closing Agreement Program (CAP), implemented on December 21, 1991, generally permits a plan sponsor whose plan has qualification defects that do not fit within the Administrative Policy (for example, defects arising in more than one year) to enter into a closing agreement with the Service to correct the defects in all years and pay a monetary sanction. The CAP has been available both to plan sponsors with plans under examination and to plan sponsors that discover plan defects before being examined.

SEC. 3. VOLUNTARY COMPLIANCE RESOLUTION PROGRAM

01 Effective immediately, the Service will begin an experimental Voluntary Compliance Resolution (VCR) program with the objective of enhancing voluntary compliance. The program will be established at the National Office of the Service (National Office). The VCR program permits plan sponsors (including employers and trustees) to correct operational plan defects that they have identified. There will be no monetary payment based upon the sanction applicable to a disqualified plan. The plan sponsor will pay a fixed voluntary compliance fee (see Section 5.02) and will receive a compliance statement describing the terms of full correction. If the plan sponsor satisfies the correction terms, the Service will not, as an administrative matter, disqualify the plan on account of the identified defects. The voluntary compliance fee is administered under the user fee program described in Revenue Procedure 90-17, 1990-1 C.B. 479, as modified by this revenue procedure.

02 The VCR program will be available until December 31, 1993. To be eligible for the program, a plan sponsor must have contacted the Service, using the procedures set forth in Section 6, on or before that date.

03 A plan that is under an Employee Plans examination (that is, an examination of a Form 5500 series return) is not eligible for the VCR program. This includes any plan for which the plan sponsor, or a representative, has received verbal or written notification from the EP/EO Division of an impending Employee Plans examination or of an impending referral for Employee Plans examination, and also includes any plan that has been under Employee Plans examination and is now in Appeals or in litigation for issues raised in the Employee Plans examination. However, the VCR program remains available with respect to any other plan of the plan sponsor that is not aggregated (for purposes of satisfying the qualification requirements of section 401(a) of the Code) with the plan (or plans) under examination.

04 The Service will not make any finding under the VCR program of whether there are operational violations of section 401(a). Thus, each item to be considered under the VCR program must be identified as an operational violation. However, the plan sponsor's statements describing operational violations are for purposes of the VCR program. Therefore, these statements will not be regarded by the Service as an admission of a violation for any other purpose.

05 The VCR program is a compliance program, but is not based upon an examination of the plan by the Service. Therefore, the Service will generally rely upon the statements of the plan sponsor in identifying the plan's operational defects. Only the operational defects raised by the plan sponsor, related issues, and other issues presented by the plan sponsor in written or oral statements are addressed under the program, and only findings on those issues will be covered by the compliance statement.

06 Under the program, the plan sponsor must make full correction of all defects for all years for which the defects exist. The corrections determined to be necessary by the Service will be set forth in the compliance statement addressed to the plan sponsor. The compliance statement will be conditioned upon the implementation of the specific corrections within the stated time period.

07 The Service must also be assured that the plan sponsor has initiated or will initiate administrative procedures for operating the plan so that the operational defects will not recur and the plan will be properly administered. Under the VCR program, the Service reserves the right to prescribe appropriate administrative procedures in the compliance statement. The Service will first discuss the appropriateness of existing procedures with the plan sponsor. Where the current procedures are inadequate for operating the plan in conformance with the qualification requirements of the Code, the compliance statement will be conditioned upon the implementation of stated procedures within the stated time period.

08 Within 21 calendar days after the compliance statement is issued, the plan sponsor will be required to send a signed acknowledgement letter to the Service, agreeing to the terms of the compliance statement.

09 Once the compliance statement has been issued, the Service reserves the right to require verification that the corrections have been made, and that any administrative procedures required by the statement have been implemented.

10 If the National Office issues a compliance statement, and the plan sponsor implements the corrections and procedures stated in the statement, information given by the plan sponsor to the Service under the VCR program will not be used as the basis of an Employee Plans examination (other than the follow-up determination referred to in subsection .09, above). If resolution cannot be reached with respect to the correction or administrative procedures, or the plan sponsor does not send a signed letter agreeing to implement the corrections and procedures described in the compliance statement, or the plan sponsor does not implement the stated corrections and procedures within the stated time period, the case may be referred to the appropriate EP/EO Key District Office for consideration for examination.

11 Because the VCR program is a compliance program, relating directly to the enforcement of operational qualification requirements, the information received or generated by the Service under the program is subject to the confidentiality requirements of section 6103 of the Code.

12 The VCR program constitutes a resolution under the Code of the specific operational defects identified by the plan sponsor. This resolution shall have no effect on the rights of any party under any law, including Title I of the Employee Retirement Income Security Act of 1974.

13 While the VCR program is in effect, a plan defect that is eligible for correction under the VCR program is not eligible for correction under CAP. However, during a transition period, each plan sponsor who is currently negotiating a closing agreement on a plan as a "walk-in" (that is, having voluntarily asked for a closing agreement on a plan that had not been selected for examination), and whose plan is eligible for the VCR program, will be contacted and given a choice between the VCR program and CAP.

SEC. 4. SCOPE

01 The VCR program is available only for plans that have received a favorable determination letter that considered TEFRA, DEFRA and REA, including standardized plans adopted by employers that are treated as having received such a favorable determination letter in accordance with section 6 of Revenue Procedure 89-9, 1989-1 C.B. 780 (as modified by Revenue Procedure 90-21, 1990-1 C.B. 499, and Revenue Procedure 91-66, 1991-2 C.B. 870,) or section 11 of Rev. Proc. 89-13, 1989-1 C.B. 801 (as modified by Revenue Procedure 90-21, 1990-1 C.B. 499, and Revenue Procedure 91-66, 1991-2 C.B. 870). The VCR program is available only for operational violations of the plan qualification requirements under section 401(a) of the Code.

02 Certain defects are not eligible for the VCR program. In general, defects are ineligible because they are not qualification defects or, if they are qualification defects, they involve issues that the Service deems inappropriate for the program. Qualification defects involving the following issues will not be eligible under the program:

(1) Exclusive benefit violations relating to the misuse or diversion of plan assets.

(2) Repeated, deliberate or flagrant violations. It is expected that the Service will view violations as repeated, deliberate or flagrant only in unusual circumstances. This list may be supplemented or modified as appropriate.

03 In general, operational defects which give rise to income tax or excise tax issues rather than disqualification issues are not eligible for the VCR program because the statutes already provide specific tailored sanctions for those defects. For example, neither funding deficiencies nor prohibited transactions can be corrected under the VCR program. However, the VCR program will be available to correct qualification defects arising under sections 401(a)(9) or 401(k) of the Code. In these instances, as part of the VCR program, the National Office and the plan sponsor will enter into a closing agreement to resolve the related tax issues.

SEC. 5. VOLUNTARY COMPLIANCE FEE

01 A voluntary compliance fee is collected through the user fee program. The procedures set forth in Revenue Procedure 90-17, as modified by this section, apply to the voluntary compliance fee. The fee is described in section 5.02.

02 The voluntary compliance fee depends on the assets of the plan and the number of plan participants.

(1) The fee for a plan sponsor with plan assets of less than $500,000, and no more than 1,000 plan participants, is $500.

(2) The fee for a plan sponsor with plan assets of at least $500,000, and no more than 1,000 plan participants, is $1,250.

(3) The fee for a plan sponsor with more than 1,000 plan participants but less than 10,000 plan participants is $5,000.

(4) The fee for a plan sponsor with 10,000 or more plan participants is $10,000.

03 The plan sponsor will use the number shown on line 7(f) or (g) (using the numbers from the 1991 Form 5500) of the prior year's Form 5500 to establish the number of plan participants. The plan sponsor will use line 34f. (of the 1991 Form 5500) or line 31f. (of the 1991 Form 5500 C/R) or line 9a. (of the 1991 Form 5500 EZ) to establish the amount of the plan assets, or the equivalent lines for later versions of the Forms 5500.

SEC. 6. VCR PROCEDURES

01 This section sets forth the procedures for requesting a compliance statement from the National Office. In general, a request consists of a letter from the plan sponsor or the plan sponsor's representative to the National Office that contains a description of the defect(s), a description of the proposed method of correction, and other procedural items, and includes supporting information and documentation as described below.

02 The letter from the sponsor or the sponsor's representative must contain the following:

(1) A complete description of the operational defects and the years in which the defects occurred, including closed years (that is, years for which the statutory period has elapsed).

(2) A description of the current administrative procedures for the plan.

(3) An explanation of how and why the defects arose.

(4) A description of the methods for correcting the defects that the plan sponsor has implemented or proposes to implement.

(5) A description of the measures that have been or will be implemented to ensure that the same operational defect will not occur again.

(6) A statement that, to the best of the plan sponsor's knowledge, the plan is not currently under an Employee Plans examination (as defined in section 3.03 of this revenue procedure).

(7) The location of the Key District Office that has jurisdiction over the plan.

03 The submission must be accompanied by the following documentation:

(1) A copy of the first two pages of the most recently filed Form 5500 series return.

(2) A copy of the determination letter that considered TEFRA, DEFRA and REA (or opinion letter, in the case of a standardized plan) and any subsequent letter.

(3) A copy of the relevant portions of the plan document.

04 The submission must be signed by the sponsor or the sponsor's representative.

05 To sign the submission or to appear before the Service in connection with the submission, the representative must comply with the requirements of section 9.01(9) of Rev. Proc. 92-4, 1992-1 I.R.B. 66.

06 The following declaration must accompany a VCR program submission and any factual information or change in the submission at a later time: "Under penalties of perjury, I declare that I have examined this submission, including accompanying documents, and to the best of my acknowledge and belief, the facts presented in support of the VCR program submission are true, correct, and complete." A sponsor which submits additional factual information on several occasions may provide one declaration that refers to all submissions. The declaration must be signed by the plan sponsor, not the sponsor's representative.

07 The submission must include the appropriate voluntary compliance fee described in section 5 of this revenue procedure.

08 The letter to the Service should be marked "VCR PROGRAM" in the upper right hand corner of the letter.

09 The submission should be mailed to:

     Internal Revenue Service

01 If the submission fails to comply with the provisions of this revenue procedure or additional information is required, the Service representative assigned to the case will contact the sponsor or the sponsor's representative and explain what is needed to complete the submission. The sponsor will have 21 calendar days from the date of this contact to provide the requested information. If the information is not received within 21 days, the matter will be closed, the compliance fee will not be returned, and the case may be referred to the appropriate EP/EO Key District Office in accordance with section 3.10 of this revenue procedure. Any request for an extension of the 21-day time period must be made in advance, in writing, and must be approved by the Chief of the VCR program.

02 If the National Office initially determines that it cannot issue a compliance statement, the plan sponsor or the plan sponsor's representative will be contacted by the Service representative and offered a conference in the National Office. The conference can be held either in person or by telephone. The conference must be held within 21 calendar days of the date of contact. The sponsor or the sponsor's representative will have 21 calendar days after the date of the conference to submit additional information in support of the submission. Any request for an extension of the 21-day time period must be made in writing and be approved by the Chief of the VCR program. Additional conferences may be held at the discretion of the National Office.

SEC. 8. COMPLIANCE STATEMENT

01 The plan sponsor will receive a compliance statement from the National Office. The statement will state the defects identified, the required corrections, and any administrative procedures upon which the statement is conditioned. The statement will also state the time frame in which the corrections and procedures must be implemented.

02 The plan sponsor will also receive an acknowledgement letter to be signed by the plan sponsor (see Appendix). Within 21 calendar days of receipt of the compliance statement, the plan sponsor must return the signed acknowledgement to the National Office, agreeing to the terms of the statement.

03 If the signed acknowledgement is not returned within the time frame specified, the case may be referred to the EP/EO Key District Office for consideration for examination.

SEC. 9. EFFECT ON OTHER DOCUMENTS

Revenue Procedure 90-17 is modified as provided in Section 5 of this revenue procedure.

DRAFTING INFORMATION

The principal author of this revenue procedure is Karen Field of the Employee Plans Technical and Actuarial Division. For more information concerning this revenue procedure, call the Employee Plans Technical and Actuarial Division Taxpayer Assistance Number, (202) 622-6074 (not a toll-free number), Monday through Thursday between 1:30 pm and 4:00 pm, Eastern Standard Time. Mrs. Field may be reached at (202) 622-6214 (also not a toll-free number).

APPENDIX

                        Acknowledgment Letter

We have received the Compliance Statement dated [INSERT DATE OF STATEMENT) with respect to [INSERT NAME OF PLAN] and agree to its terms.

We understand that the Compliance Statement is conditioned on the completion of the actions described therein and that this letter must be returned to your office by [INSERT DATE 21 DAYS AFTER DATE OF STATEMENT).

Sincerely yours,

[INSERT NAME OF PLAN SPONSOR)