Fiduciary Audit ® Protection Program

The Problem

IRS Employee Plans Closing Agreement Program (CAP)

IRS imposes CAP monetary sanctions on plan sponsors (employers and trustees in the case of multi-employer plans) for:

• Failure to operate 401(k)/retirement plans in accordance with IRS qualification requirements.
• Failure to follow the terms of the plan documents even if plan operation is within compliance.

The amount of CAP monetary sanctions can be substantial since the required payment amount is based on the total tax imposed on the employer, trust and participants if the plan were disqualified.

Sanctions are imposed by IRS on audit even if administrative errors are unintentional and/or plan document failures result in no harm to participants.

Over 5000 CAP audits have been concluded and have resulted in the imposition of sanctions for failure to comply operationally with IRS qualification requirements.

Significant Exposure for Small Plan Sponsors

• IRS targets small plan sponsors who can't fight the IRS and don't have ERISA lawyers to negotiate CAP sanctions.
• IRS imposes sanctions even if violations are unintentional operational/plan document discrepancies.
• Monetary sanctions of $50,000 have been imposed where employer corrects plan documentation/operational discrepancies on a voluntary basis ("Walk-in CAP")
• Monetary sanctions imposed by IRS on audit (without voluntary correction prior to audit) are substantially higher.

Mergers and Acquisitions

• Required representation and warranty on employee plan compliance not only seeks to require that the plan document satisfy ERISA and IRS qualification requirements, but also that the plans are being operated in accordance with the plan documents and in accordance with the IRS qualification requirements.
• Difficulty in conducting an operational review and correcting document/operational failures prior to closing

Director's Liabilities

Civil liability for corporate directors who fail to establish reporting and information systems "reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation's compliance with law and its business performance." In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 at 969.

ABA's Corporate Directors' Guidebook and Federal Securities laws encourage corporations to implement compliance programs where federal agency (IRS) has established self-audit compliance program for corporations to identify and correct law violations

Federal sentencing guidelines offer substantial penalty reductions for corporations whose compliance procedures meet certain criteria.

Significant Exposure for Large Plan Sponsors

Sanctions of between $20-$35 million have been imposed as a result of an IRS audit of a large 401(k) plan which identified operational violations such as:

• Failure to satisfy participant consent requirements for lump sum distributions.
• Not complying with certain IRS disclosure requirements to insure "informed" consent on joint and survivor and tax explanations.
• IRS required the plan sponsor to retain an independent auditor at a cost of approximately $3 million to report operational compliance to the IRS for a two year period and to retroactively correct all operational defects.
• Correction of operational defects included the mailing of letters to approximately 55,000 former participants "inviting" them to recontribute their lump sum distributions to the plan.

Significant exposure for large plan sponsors have also included:

• $7.5 million in monetary sanctions for inadvertent delayed enrollment of rehired employees affecting less than 1% of the plan participants.
• $9 million, even though the principal violation was failure to obtain spousal consent from only 1-2% of the plan participants.

The Solution

In order to avoid CAP monetary sanctions, IRS revenue procedures require plan sponsors to establish a self-audit compliance process that identifies and corrects operational and document failures prior to an IRS audit.

The Fiduciary Audit ® Operaional Review enables plan sponsors to:

• Establish the required self audit internal control procedures that comply with IRS rules on a cost-effective basis.
• Review document and operational compliance in a quick and efficient manner.
• Qualify for indemnification against IRS and fiduciary liability under the Qualified Plan Insurance Program. (IRS CAP monetary sanctions are not covered by traditional fiduciary liability and D&O/E&O liability policies.)
• Effectuate the closing of mergers and acquisition transactions by insuring document/operational failures that are identified but not corrected.
• Comply with corporate governance requirement for monitoring compliance where federal agency (IRS) has established a program to identify and correct law violations.

Cost-Effective Compliance

The Fiduciary Audit ® Operational Review is a unique system technology offering cost-effective employee benefits compliance with IRS and fiduciary liability requirements.