Whistleblowing Hits Employee Benefits World

Seyfarth Synopsis: Recently a “whistleblower” leaked that the IRS had internally announced an upcoming modification to the very popular voluntary correction program (“VCP”) that would have been a significant disincentive for plan sponsors to use the VCP to report and correct plan disqualification errors. The leak went viral and sent benefits counsel and other retirement plan providers into a tizzy. Well it seems that the whistleblower may have gotten it wrong.

On February 25, a story hit the Internet that an anonymous IRS whistleblower reported that the IRS had informed its agents that in order to clear the backlog of VCP submissions, agents were instructed to enforce deadlines and automatically refer submissions for examination (e.g., IRS audit) if other VCP requirements were not timely met. For example, if an IRS deadline to provide additional information was not met or if the plan sponsor and IRS could not agree on an acceptable correction method, the plan would automatically be referred for IRS examination.

This put all of us into a real dither. The VCP was established almost 30 years ago and was a welcome relief to plan sponsors who discovered operational or plan document mistakes. Before the VCP was established, a plan sponsor faced the difficult choice to either sweep the mistake under the rug and hope for the best, or to apply to the IRS for a “closing agreement.” Given that obtaining a closing agreement was no certainty, might be costly and corrective measures and sanctions were very much uncertain, it should be no surprise the approach many sponsors took – sweep, bury, hope and pray.

So when the IRS established what eventually evolved into the VCP, good-intentioned plan sponsors now had a way to bring plan mistakes out into the light of day and fashion a correction without all the uncertainty of seeking a closing agreement. This is why everyone reacted strongly to the news that agents were encouraged to refer submissions for examination when a disagreement arose or delays ensued. Threatening plan sponsors with referral for an IRS audit seemed a bit of a “throwing the baby out with the dirty bathwater” approach to the problem.

It looks like the whistleblower’s interpretation of the directive may have been misguided. At the recent Tax-Exempt Entity/Governmental Entity (TE/GE) National Meeting in Washington DC, a senior TE/GE official clarified that the VCP was not being changed, and that agents were only reminded that they already had discretion to seek examination of an underlying plan if inquiries and requests for additional information were ignored or if the negotiation of an appropriate correction became deadlocked. The senior TE/GE official also stated that the cooperative attitude of the IRS was not changing, although it is hard to know how this might play out if, for example, the IRS makes a request than cannot be answered timely.

So it seems the IRS does not want the VCP to go the way of the do-do bird, and is painting the whistleblower as misinterpreting the internal discussions. Or perhaps it was just a hoax intentionally perpetrated to distract from the real news in the employee benefits world – the SECURE Act will require plans and plan sponsors to consider the numerous changes required or available to their retirement benefit plans? We doubt that Congress will open an investigation to find the truth, so we’ll all be left to wonder! In any event, here’s a link to a recent Legal Update on the SECURE Act we prepared so that you can start thinking about which changes you want to make to your retirement plans. It’s a good read!