Compliance November 3, 2021

Getting Retirement Plan Help From the IRS

Retirement plan sponsors have several avenues for getting help from the IRS with general questions, technical issues and corrections.
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Art by Lior Hizgilov

When it comes to helping individuals with tax problems, the IRS has a reputation for being unhelpful and difficult to reach. However, sources say the agency is more responsive to plan sponsors looking for plan direction.

“The IRS staff in the employee plans department is generally knowledgeable and very willing to speak to plan sponsors or their advisers,” says Ari Sonneberg, partner and chief marketing officer for the Wagner Law Group in Boston. “They’re usually very helpful to the extent that they can be over the phone.”

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Still, the agency has become harder to reach since the COVID-19 pandemic pushed many workers into remote positions, and it’s helpful to know exactly whom to contact within the employee plans department rather than calling the general helpline. So plan sponsors and their advisers still need a game plan if they want IRS help.

Plan sponsors might need assistance with issues including the creation or termination of a plan, or correcting a failure of either documentation or administration.

“It’s critically important that people don’t even informally rely on guidance from people at too low a level at the IRS,” says Michael Wieber, a partner with Quarles & Brady LLP in Milwaukee. “You want to get an agent in the appropriate area if you want any comfort that the IRS would see things the same way that as that person.”

Help Reaching the IRS From Plan Sponsor Providers

Many retirement plan professionals pay for access to a private IRS directory that includes information on who to call based on the IRS code in question, says Jared Johnson, a partner in the tax group at White and Williams LLP in Philadelphia. Or they have their own contacts they’re built up at the agency through helping other clients with similar issues, says Steven Sokolic, of counsel at Retirement Law Group in San Diego.

So it often makes sense to work with an adviser, a retirement plan consultant, an enrolled retirement plan agent (ERPA) or certified public accountant (CPA), says Johnson. “Retirement plan specialists can interface directly with the IRS counsel’s office.”

Plan committees should meet at least twice a year to review their plan for any potential failures and determine whether they need to take corrective action with help from the IRS, Johnson says. If the answer is “yes,” the sooner a plan sponsor can begin the process, the better.

“Don’t wait until the last minute to make decisions, especially on things like vesting or participation if the issue is looming,” Sonneberg says. “Plan sponsors think they can call the IRS and quickly get an answer, but it can take weeks depending on how backed up it is.”

Online Help

A phone call is typically only the beginning of the process, since oral advice is always considered advisory and not binding on the agency, according to the IRS’ website. The IRS also says it does not orally issue rulings or determinations in response to oral requests.

The first step, of course, is determining whether you need to go to the IRS at all, Sonneberg says. In general, the IRS can help with participation, vesting, funding and tax issues, while fiduciary concerns should be addressed by the Department of Labor (DOL).

For basic, straightforward questions, the best route is to go through the IRS website, says Elizabeth Thomas Dold, a principal with Groom Law Group, Chartered, in Washington, D.C.. In recent years, the agency has bolstered its self-help offerings with both written and video content aimed at answering frequently asked questions (FAQ). In particular, the agency’s “Issue Snapshots” and “Fix-It Guides” may answer many plan sponsor questions, she notes.

“The IRS has taken great strides over the past 10 years or so to make the retirement plan section of the website as user-friendly as possible,” Johnson says.

Even issues that used to require IRS guidance, such as implementing a correction through the Employee Plans Compliance Resolution System (EPCRS), can now often be done by the plan sponsor entirely online without human interaction with an agent, Dold says. Plan sponsors might use the online process to correct issues such as a miscalculation for a hardship distribution or a using an incorrect definition of compensation for safe harbor testing.

Components of ECPRS include the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP).

You fill out the forms on the website and submit your proposed correction,” Sonneberg says. “[The IRS staff] generally offer their blessing, if it’s a reasonable correction and it makes the participants whole again.”

VCP applications, the most commonly used, typically take about four months to process, or maybe longer if there are errors or other issues with the compliance statement, Dold says. New rules from the IRS will eliminate the ability for a company to submit a VCP anonymously, but a pre-conference procedure for a VCP can still be done anonymously.

Determination Letters and Letter Rulings

For more complicated issues, plan sponsors can take several routes to get IRS help. For questions related to preventing future problems when starting a new plan, terminating an existing one or merging two plans, for examples, plan sponsors might request a determination letter, Wieber says, which, according to the IRS website, costs $275. The IRS recently changed the rules to allow plan sponsors and their advisers to apply for letter rulings and determination letters electronically.

“Those are more focused on the language of the documents themselves, as opposed to interpretations or facts that may not be accurately stated or may change over time,” Wieber says.

To get a determination letter, a plan sponsor will need to submit a complete statement of facts and a detailed description of the transaction. In general, the IRS will not provide a ruling on one step of a larger transaction, preferring to rule on the overall transaction, according to the IRS website.

Plan sponsors with pre-approved documents can get an opinion letter, in which the IRS essentially gives its blessing that a plan’s format is acceptable and written in a way that satisfies the legal minimums for what a document should look like, Wieber says. “That gives the plan sponsor comfort that if it starts from this place and fills in the blanks, the document will meet the technical requirements,” he adds.

Fixing Mistakes

More common than questions about new plans, however, are questions on compliance resolutions for plans that have failed in one way or another and do not qualify for the VCP program.

“If the method of correction is unclear or there are multiple ways that you might reasonably correct something, you can get the IRS to rule on your correction method through a private letter ruling [PLR],” Wieber says. In that case, the IRS is making a specific judgment on a specific situation. PLRs are helpful to plan sponsors, but they’re pricey, he notes. According to the IRS website, depending on the issue addressed, a sponsor could owe $5,000 to $38,000. PLRs can also take months or a year to complete, which can cause significant problems for a plan that has an immediate issue or question, says Wieber.

“That’s a lot of money and a big commitment,” says Dold. “So, most people ask whether there’s another avenue.”

In those instances, plan sponsors will need to discuss with their lawyer whether it makes sense to go through the PLR process or to simply make their best good faith decision and move forward.

“I can’t tell clients who do that that there is no risk,” Wieber says. “But most employers are taking bigger risks every day in their business. This is about taking a reasonable position based on what’s out there.”

Plan sponsors that go this route should document the decisionmaking process, including by getting an opinion letter from an attorney, which can go a long way toward protecting them in the event of not only a fiduciary claim but also to show the IRS that they were attempting to do the right thing.

“Even if the IRS ultimately disagrees with you, you may be able to avoid or reduce penalties and interest by showing that you were trying to be prudent in your approach,” Wieber says.

Compliance October 26, 2021

A Pro-ESG Framework That Could Finally Stick

Now that industry experts have had some time to digest the DOL’s new proposal regarding the use of ESG investment factors by retirement plan fiduciaries, many seem to like what they see.
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The U.S. Department of Labor (DOL) announced a proposed rule two weeks ago that would remove barriers to retirement plan fiduciaries’ ability to consider climate change and other environmental, social and governance (ESG) factors when they select investments and exercise shareholder rights.

Titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” the proposal stretches to 109 pages and, as is par for the course, includes some fairly nuanced language that speaks to fiduciaries’ duties under the Employee Retirement Income Security Act (ERISA). Now that retirement plan industry experts have had some time to digest the proposal, many seem to like what they see, with the early consensus being that the rule should facilitate broader use of ESG factors by investors who have long been calling for such an expansion.

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The proxy voting side of the proposal will be addressed in a subsequent article, but the feedback on that side has also been largely positive.

Greater Clarity

John Hoeppner, head of U.S. stewardship and sustainable investments, Legal & General Retirement America, tells PLANSPONSOR he had anticipated that the DOL would provide some clarifying language about the reasonability of ESG-integrated options, but he was “delighted and surprised” to see the rule specifically call out the use of ESG factors within investment options serving as a retirement plan’s qualified default investment alternative (QDIA).

“The signaling impact of this decision is enormous, in my opinion,” Hoeppner says, noting his organization was “quite concerned” about the ESG and proxy voting rules that had been implemented late in the Trump administration. In Hoeppner’s view, those rules were overly restrictive and seemed to be tied to a more antiquated perspective on the purpose and technical aspects of ESG investing.

“In terms of the comment period and the final rule, I expect this package could be slightly modified, but I think the main parts will stick,” Hoeppner says. “Then, the real action happens when the first one or the first handful of major corporate defined contribution [DC] plans publicly change their default to an ESG option—when you get the likes of a Disney or a Ford moving in this direction. That will be a really big deal that could drive significant momentum toward more universal use of ESG investments within U.S. retirement plans.”

Good Timing

Julie Stapel, a partner in Morgan Lewis’ ESG and sustainability group, notes that the timing of the filing is meaningful. In basic terms, the fact that this proposal has been made relatively early on in the Biden administration means it will have much more time to actually be implemented and to gain momentum compared with prior administrations’ efforts to change the rules in this area.

“My first overall impression is that, if this is finalized in something like its draft form, it will be very helpful to fiduciaries who have already started to go down this road toward embracing ESG investing,” Stapel says. “I think plan fiduciaries, as represented by the clients we work with, are at many different places along this road, due to a variety of factors, but this proposal will make their journey far easier and more secure.”

Echoing comments made by Hoeppner, Stapel says the proposed rule likely won’t cause a massive, sudden change in direction for the institutional retirement planning marketplace—but it may spark different parties to start thinking more seriously about ESG investing, and, in her view, that is a good thing.

“This proposal is a pretty unequivocal statement of the DOL’s view that, not only can ESG be an appropriate fiduciary consideration, sometimes it actually needs to be,” she says. “I don’t think the DOL could have given a clearer endorsement of ESG investing under ERISA.”

The QDIA Language Matters Most

Stapel says she feels the part of the proposal addressing QDIAs is meaningful, though she was less surprised to see it than Hoeppner was, given her opinion that the Trump administration’s rulemaking in this area caused a lot of confusion and consternation among both the asset management community and retirement plan sponsors. 

“The issue was that practically all the off-the-shelf QDIAs that are so popular in the marketplace are already using ESG factors to one extent or another,” Stapel observes. “There were a lot of people asking questions about whether their QDIA might actually be running afoul of the rules. The proposal directly addresses this very real and important concern.”

In a blog post on the proposed rule, Sarah Bratton Hughes, global head of sustainability solutions at Schroders, says the regulatory activity demonstrates the current administration’s view that ESG factors often can be a critical component in assessing potential investments.

“If the final rule is adopted substantially as proposed, it would signal a significant moment for the U.S., but would also draw interest from those working with sustainability rules in other investment markets,” she says. “The direction in the U.S. is now clear. The approach taken prior to 2017—and unwound by the previous administration—is coming back. We have gone back to the future.”

ESG Is About More Than Climate Change

As Bratton Hughes explains, although climate change is mentioned throughout the proposal’s preamble as a major potential risk impacting long-term returns, the DOL is clear that material ESG factors can address much more than just climate change. To this end, it included several examples. Under the heading of workforce practices, for example, the DOL cites as potentially financially material a corporation’s progress on workforce diversity and its level of investment in fostering positive labor relations. Under governance factors, the DOL says items such as board compensation and transparency in corporate decisionmaking can be important—as is a corporation’s avoidance of criminal liability and its compliance with labor, employment, environmental, tax and other applicable laws.

Hoeppner, Stapel and Bratton Hughes all say the proposal’s “ESG tiebreaker” language is somewhat important. Currently, collateral ESG factors can be considered only as a tiebreaker where two competing investments are economically indistinguishable. Moreover, the rules as they exist today impose significant documentation provisions, requiring investors to demonstrate that the tiebreaker was used only in that limited context.

The proposed rule, on the other hand, would adopt a more general principle. Under that language, when a fiduciary concludes that two competing investment approaches “equally serve the financial interest of the plan,” the fiduciary could base an investment decision on “economic or non-economic benefits other than investment returns.”

Bratton Hughes says the Biden DOL seems to think the special documentation requirements from the previous rule create an impression that fiduciaries should be wary of considering ESG factors, even when those factors are financially material to the investment decision.

All three sources say this is a positive step forward for ESG investing in the U.S.

Potential Changes and Additional Interpretation

Stapel says there’s one potentially important change she would suggest to the proposed rule.

“It has to do with the section of the proposal labeled (b)(4),” she explains. “This section is where the proposal spells out that fiduciaries can consider ‘anything that is material to the risk-return analysis of an investment.’ This would have been a good place to put a period and stop—to just leave the language as direct as possible. But the proposal goes on to give potential examples, such as climate change and several other things. I fear that these examples, because they are written into the proposal, may reduce the durability of this rule if and when we face a change in the administration. It only serves to alienate, that language. To put that finer point on it, I’m afraid that part of the proposal may bring in politics, frankly.”

A team of attorneys with the Wagner Law Group also sent their interpretation of the proposal to PLANSPONSOR. They emphasize that the details of the proposed regulations will be scrutinized by many different concerned parties in the coming months, noting that public comments are due on December 13.

“Unlike the 2020 rule, however, this proposed revision of the investment duties rule arguably creates more room for the neutral exercise of fiduciary discretion with fewer regulatory constraints,” they write, “Thus, it is likely not to generate a wave of opposition as its predecessor did.”

Another important point of analysis came from Josh Lichtenstein, a Ropes & Gray ERISA partner.

“The rule may actually cause plan sponsors to seek out descriptions of the ESG characteristics of funds which are not ESG-focused/impact funds,” he says. “This is because the rule, both in text and in the preamble, discusses the importance of the economic aspects of ESG. The regulation states that investment considerations ‘may often require an evaluation of the economic effects of climate change and other environmental, social or governance factors on the particular investment or investment course of action.’ This could be read to imply that plan sponsors need to be able to justify any decision not to consider ESG factors.”

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