By Jeff Chang
Recently announced changes in the IRS-sponsored Voluntary Compliance Program (VCP) may encourage public agencies with known plan compliance problems or defects to apply this calendar year under Anonymous VCP, before that option is replaced in 2022.
As part of its periodic update to the Employee Plans Compliance Resolution System (EPCRS), reflected in Revenue Procedure 2021-30, the IRS will eliminate the anonymous VCP feature and will replace it with an anonymous presubmission conference feature, beginning in 2022.
This change in EPCRS may be important to a number of public agencies (and other employers with retirement plans) for the following reasons:
- Potential loss of a useful tool. Many employee benefits practitioners have extensively used anonymous VCP as a way to resolve significant retirement plan compliance problems – ones for which there are no easy answers. In fact, many of the these types of problems are amenable to several differing methods of correction, some more favorable to affected employees and some less favorable. Anonymous VCP can be very useful because it enables sponsors and their advisers to anonymously submit, suggest, and perhaps negotiate a difficult compliance issue without binding the sponsor to a particular correction outcome, which may not be acceptable to it or to its affected employees. Under anonymous VCP, if a submitter is unable to get the IRS to agree with its proposed method of correction for a particular problem, the plan sponsor can withdraw the application while maintaining anonymity.
- Not clear how the anonymous presubmission conference feature will work. Although the anonymous VCP feature is being replaced by an anonymous presubmission conference feature – one which may provide greater flexibility to the IRS because it is not considered part of a formal VCP submission and does not bind the IRS (with respect to corrections that are discussed) – a number of practitioners have agreed that the presubmission conference feature may not work as well for plan sponsors with more difficult or complex compliance problems.
- Many public agency plan compliance problems lend themselves to an anonymous VCP approach. First, we tend to see compliance problems within public agency 457(b) and 401(a) plans that have existed, and not been addressed, for many years or decades. As a result, the “correction” of these problems potentially affected many employees and former employees. Second, because the range of possible corrections often can involve the imposition of certain taxable events with respect to a plan, either in the past or in the future, it is highly preferable for a governmental plan sponsor to pre-negotiate (with the IRS) any such correction so it will know how to deal with its affected employees and unions. Third, many cities and special districts (and their plan recordkeepers) do not always maintain the best, most up-to-date information about the whereabouts of former employees. As a result, it is often desirable and necessary to negotiate a correction or earnings credit methodology that is more simple than the IRS’s pre-approved methods.
In prior posts, we have discussed some of the problems we have come across that seem somewhat unique to the public agency retirement space. If you work with a plan with known, but seemingly unsolvable compliance or qualification problems, you may want to take advantage of the current anonymous VCP option before it is no longer available.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.