The Internal Revenue Service (IRS) requires that pre-approved qualified employee retirement plan documents be restated every 6-years to stay compliant as pre-approved plans. When plan sponsors miss the pre-approval deadlines, they risk losing qualified status, which could result in employees being taxed on plan contributions. In the past, some plan sponsors used the IRS' Voluntary Correction Program (VCP) to correct late submissions. However, the IRS introduced an Umbrella Closing Agreement Program for some larger scale corrections as an alternate method of correction.

The IRS announced the umbrella closing agreement program for financial institutions and service providers to submit proposals for corrections to qualifying plans. The umbrella closing agreement is an alternative to making VCP submissions.

This program is available with a minimum of 20 plans covered by the closing agreement. The submitted closing agreement should include plans maintained by eligible participating employers where the service provider can certify a record of:

1. Consent to participate - affirmative agreement to participate in the closing agreement program;
2. Prior document compliance - adoption of pre-approved defined contribution plans for the Economic Growth Tax Relief Reconciliation Act of 2001 (EGTRRA) by the required deadline stated in Notice 2004-84; or if late, IRS compliance statements to correct for the late adoption of EGTRRA documents; and
3. Correction of the document issue - execution of the PPA restatement using the service provider's pre-approved document.

After the application is approved, service providers and financial institutions will have 120 days from the closing agreement execution date to provide a final list of covered employers and pay any applicable fees.

There is a $10,000 fee for the first 20 plans plus $250 for each additional plan (up to a maximum of $50,000). This fee structure is similar to the Group Submission fee under the VCP. There was a 50% reduction in fees for first-year participants; however, that reduced fee deadline passed on April 30, 2017.

Financial institutions and providers can still make corrections through the Voluntary Correction Program. However, with the umbrella closing agreement option, there does not have to be a system-wide error. Instead, this allows the financial institution to seek correction across a group of employers. An umbrella closing agreement correction can be more cost-effective and simpler for providers looking to make group corrections.

Any questions about plan corrections should be addressed as soon as possible. If a previously qualified retirement plan is disqualified, it can have an effect on the employees, employer, and the plan's trust. For example, disqualified plan contributions may not be tax-deductible and could be subject to additional payroll taxes, including Social Security, Medicare, and unemployment taxes.

If you have any questions about making changes to your company's retirement plan, Butterfield Schechter LLP is here to help. We are San Diego County's largest firm focusing its law practice on employee benefits and business tax law. Our firm can provide fiduciary counseling and help you stay compliant with federal ERISA and tax regulations. Contact our office today with any questions on how we can help you and your business succeed.