Advisory Committee on Tax Exempt and Government Entities (ACT ...

Improving the Employee Plans Compliance Resolution System: A Roadmap For Greater ComplianceUnder CAP, the party to the closing agreement was required to pay a non-deductiblesanction amount to the government to maintain the plan’s qualified status. The startingpoint for determining the sanction amount was the maximum tax liability that wouldresult from the disqualification of the plan, including loss of the employer’s taxdeductions, tax on trust earnings, inclusion of contributions in employees’ income, andpenalties and interest for all open years. 23 A reduction in this so-called “maximumpayment amount” could be negotiated based on the facts and circumstances of aparticular case. In general, the Service would take into account such considerations asthe inadvertence of the error, significance of the defect, and any other relevant equitablefactors.In imposing a sanction amount, the Service could take into account the employer’sfinancial situation, and it could impose a lower sanction amount than it would otherwiseif the employer could demonstrate financial hardship. In a bankruptcy situation, theService would take into account the percentage recovered by general creditors. 24Moreover, the Service could take into account the hazards of litigation, and it couldimpose a lower sanction where there was some question as to whether the Servicewould prevail if the matter were litigated. 253. The Development of a Separate Correction Mechanism for 403(b)PlansRev. Proc. 95-24 26 established a separate temporary (through October 31, 1996),experimental program designed to encourage voluntary compliance by section 403(b)plans. The Tax Sheltered Annuity Voluntary Compliance Program or “TVC” program, asit was called, permitted employers who offered 403(b) plans to voluntarily identify andcorrect plan defects. Employers who took advantage of TVC received writtenassurances that the Service would not pursue available tax remedies. Rev. Proc. 96-50extended the TVC program through December 31, 1998. 27The original TVC guidance suffered from some serious drawbacks, limiting theprogram’s appeal. The potential sanction amounts were significant, and the programwas not available to fix a number of commonly encountered defects. The Service laterexpanded TVC, made it permanent, and addressed many of its shortcomings inRev. Proc. 99-13. 2823 See section on “General Guidelines for Closing Agreements” in memorandum dated Dec. 21, 1990 concerning the CAP Program. 24 Statement of Martin I. Slate, 19 BNA Pension Rept. 1027 (6/22/92).25 “Litigation Strategies in Retroactive Disqualification Cases,” Pension Plan Guide (CCH) 26,281 (Sept. 6, 1991) at 27,037-41 andn. 17.26 1995-1 C.B. 694.27 1996-2 C.B. 370.28 1999-5 I.R.B. 52 (2/1/99).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 12