IRS EXPLAINS PENSION PLAN CLOSING AGREEMENT PROGRAM.

Rev. Proc. 94-16

SECTION 1. PURPOSE

This revenue procedure describes the relationship between the Voluntary Compliance Resolution (VCR) Program set forth in Revenue Procedure 92-89, 1992-2 C.B. 498 and modified by Revenue Procedure 93-36, 1993-29 I.R.B. 73 and the Employee Plans Closing Agreement Program (CAP) implemented on December 21, 1991 and published in chapter 11 of Internal Revenue Manual 7(10)54. This revenue procedure explains the compliance options and sanction limitations applicable to sponsors of employee retirement plans which voluntarily request consideration under CAP because of disqualifying defects that are not eligible for the VCR Program.

SEC. 2. BACKGROUND

.01 The Service currently has three administrative programs for correcting operational plan defects:

(1) The Administrative Policy Regarding Sanctions (APRS), implemented on March 26, 1991 and published in section 660 of the IRM 7(10)54, 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. Under the APRS, a minor defect can be corrected without payment of a sanction.

(2) CAP generally permits a plan sponsor whose plan has qualification defects that are not appropriate for resolution under APRS to enter into a closing agreement with the Service to correct the defects in all years and pay a monetary sanction negotiated with regard to the equities of the case and based on the total that the Service would collect as taxes upon plan disqualification. CAP is not generally available for defects that are repeated, deliberate or flagrant, or that involve the diversion of trust assets. CAP is available both to plan sponsors with plans under examination and to plan sponsors that discover plan defects before being examined. A Closing Agreement is a part of the Service's examination function, and constitutes an examination of a plan for the specific matter being addressed.

(3) On November 16, 1992, the Service established the VCR Program as a temporary, experimental program ending on December 31, 1993. The VCR program permits eligible plan sponsors to correct qualification defects, provided that the plan has received a determination letter that considered 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). Plan sponsors pay a voluntary compliance fee based upon the size of the plan and are not required to pay a monetary sanction. A plan is not eligible for the VCR program if it is under examination, or if it has violations that are egregious. The VCR Program was extended for a year and modified by Revenue Procedure 93-36, 1993-29 I.R.B. 73.

.02 Sponsors of plans that are not eligible for the VCR program but are not under Employee Plans examination (as defined in section 3.03 of Rev. Proc. 92-89) have requested an opportunity, similar to the VCR program, to voluntarily correct their plan defects. This revenue procedure gives general guidance for voluntary consideration under CAP and limits, but does not determine, the sanction that will be imposed on a plan that voluntarily requests consideration under CAP.

SEC. 3. VOLUNTARY REQUESTS FOR CONSIDERATION UNDER CAP

.01 If a plan sponsor voluntarily requests consideration under CAP with respect to a specific defect (or defects), the plan sponsor and the Service will enter into a Closing Agreement negotiation with respect to the correction of the defect(s) and the amount of the monetary sanction. Payment of the monetary sanction will generally be required at the time that the Closing Agreement is signed. The Closing Agreement is binding upon both the Service and the plan sponsor with respect to the specific matter, but does not preclude or impede an examination of the plan by the Service with respect to the taxable year (or years) involved with respect to matters that are outside the Closing Agreement.

.02 The defects for which voluntary consideration under CAP is available include, but are not limited to, failure to follow the terms of the plan and failure to satisfy the qualification requirements in form or operation. In addition, certain defects that would not be eligible for correction under CAP if the plan is under Employee Plans examination will be eligible if brought in voluntarily. Thus, repeated, deliberate or flagrant violations will be eligible for consideration under CAP only if a voluntary request for CAP consideration is made before a plan is under Employee Plans examination. Plans with violations involving diversion of trust assets, however, continue to be ineligible for CAP.

.03 A plan that is not eligible for the VCR Program, because the plan does not have a determination letter that considered TEFRA, DEFRA, and REA, the defect is not operational, or the violation is considered egregious, will be eligible to voluntarily request consideration under CAP, provided that the plan is not under an Employee Plans examination. If a plan sponsor requests a compliance statement under the VCR Program but does not have an determination letter that considers TEFRA, DEFRA and REA, or the defect is not operational, the case will be returned to the employer without review, and the employer will be informed of the option to request CAP consideration on a voluntary basis. If a plan sponsor requests a compliance statement under VCR but has defects determined to be egregious, the plan sponsor will be notified of this conclusion and given 60 days to voluntarily request CAP consideration in the appropriate Key District Office (KDO). At the end of the 60 day period, if a request for CAP consideration has not been received in the appropriate KDO, the VCR request will be forwarded to that KDO for examination consideration.

.04 As with any CAP case, correction of defects must be made for all years, not just open taxable years. The Service will consider the suggestions of the plan sponsor with respect to the method of correction, but will not be bound by those suggestions.

.05 The monetary sanction required by the Closing Agreement Program will be limited to a significantly reduced percentage of the Maximum Payment Amount (described below) if the employer voluntarily requests consideration under CAP. The monetary sanction, as a percentage of the Maximum Payment Amount, will not exceed the highest percentage indicated in section 4.03 below.

.06 A request is voluntary if it is made before 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. 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 is considered to be under Employee Plans examination. CAP is available with respect to any other plan of the plan sponsor that is not aggregated (as defined in section 3.02 of Rev. Proc. 93-36) with the plan (or plans) under examination. A voluntary request for consideration under CAP may not be made as part of a determination letter application.

.07 If the Service discovers an unrelated plan defect while considering the voluntary request, that violation may be outside the scope of the voluntary request for consideration under CAP because it was not voluntarily brought forward by the plan sponsor. If the additional defect is significant, all aspects of the plan may be examined.

.08 If the Service and the plan sponsor cannot reach an agreement with respect to the correction of the defect(s) or the amount of the monetary sanction, all aspects of the plan may be examined.

.09 The Closing Agreement constitutes an agreement between the plan sponsor and the Service with respect to the specific defects identified by the plan sponsor. This resolution shall have no effect on the rights of any party under any other law, including Title I of the Employee Retirement Income Security Act of 1974.

.10 A plan that is eligible for the VCR Program is not eligible to voluntarily request consideration under CAP.

SEC. 4. SANCTION LIMITATIONS FOR VOLUNTARY REQUESTS

.01 The actual monetary sanction in an individual Closing Agreement is based upon the Maximum Payment Amount and the facts and circumstances in the case.

.02 The highest percentage of the Maximum Payment Amount that may be applied as a monetary sanction for defects for which the employer voluntarily requested consideration under CAP is 40%, but a case with less severe defects may be subject to a smaller monetary sanction. Factors considered in determining the sanction include (but are not limited to) the severity of the defect, the number and type of employees affected by the defect, the number of rank and file employees that would be hurt if the plan was disqualified, the extent to which the employer's own procedures found the error, and the cost of correction. The hazards that the Service or the employer may face if the case is litigated are not factors considered in determining the sanction. Depending on the factors, the actual monetary sanction may range from 40% of the Maximum Payment Amount to less than 5% of the Maximum Payment Amount. However, in no case will the monetary sanction be less than $1,000.

.03 The Maximum Payment Amount is approximately equal to the tax the Service could collect upon plan disqualification for the open taxable years. It is the sum of the:

(1) tax on the Trust (Form 1041),

(2) additional income tax resulting from the loss of employer deductions for plan contributions (Form 1120 or 1040), and

(3) additional income tax resulting from income inclusion by the highly compensated employees (Form 1040).

SEC. 5. PROCEDURES FOR A VOLUNTARY REQUEST FOR CAP CONSIDERATION

.01 This section sets forth the procedures for voluntarily requesting consideration under CAP. A request consists of a letter from the plan sponsor or the plan sponsor's representative to the appropriate Key District 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 or form 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 Revenue Procedure 92-89).

(7) The status of any determination letter application with respect to the plan.

.03 The submission must be accompanied by the following documentation:

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

(2) 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 9.02(11) of Rev. Proc. 94-4, 1994-1 I.R.B. 90.

.06 The following declaration must accompany a CAP request 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 knowledge and belief, the facts presented in support of the CAP submission are true, correct, and complete." The declaration must be signed by the plan sponsor, not the sponsor's representative.

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

.08 The submission should be mailed to the Closing Agreement Coordinator in the appropriate Key District Office:

 CENTRAL                  Walk-In Closing Agreement Coordinator

Because CAP is a compliance program, relating directly to the enforcement of 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.

SEC. 7. EFFECTS ON OTHER DOCUMENTS

Chapter 11 of IRM 7(10)54 is modified to limit the monetary sanction as provided in section 4 of this revenue procedure, and to permit closing agreements with respect to repeated, deliberate or flagrant violations that are voluntarily requested before the plan is under Employee Plans examination.

SEC. 8. EFFECTIVE DATE

This revenue procedure is effective January 12, 1994.

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) 622-6075 (not a toll-free number). Mrs. Field may be reached at (202) 622-6214 (also not a toll-free number).