LAWYER's BRIEF by Alvin D. Lurie

The current buzz numbers in the pension universe are 98-22, which designate the new Revenue Procedure issued by the Internal Revenue Service to consolidate the so-called compliance resolution procedures into a single unified document. If you are a pension cognoscenti -- and who would admit to being anything less -- you know that several years ago the service initiated a process whereby it could drive noncompliant pension and profit sharing plans into compliance without pronouncing the dread sentence of "disqualification", by offering some lesser sanctions in return for actions taken by the plan sponsor to rectify the disqualifying deficiencies (i.e., actions or inactions that cause the plan to fail to meet the standards for a fully qualified plan).

These procedures evolved over the next few years, to embrace successively such programs as the Administrative Policy Regarding Sanctions (naturally shortened by the trade to APRS), Voluntary Compliance Resolution (VCR), Audit Closing Agreement Program (Audit CAP), Walk-in CAP (that differed from Audit CAP in that the sponsor initiated the process by walking into the IRS office before a revenue agent walked into the sponsor's office to commence an audit) , and finally Administratrive Policy Regarding Self Correction (APRSC), with some additional, minor fine-tuning of each of these systems along the way.

Where one of these processes began and the other ended was not always clear even to the most experienced of pension practitioners. So, recently the Service put them all together in a unified program called Employee Plans Compliance Resolution System (EPCRS) , which incorporates all of them and delineates their respective borders. That's Rev. Proc. 98-22; and anyone having anything to do with servicing pension plans had better know all about this document. Actually, that last comment applies only to those who have responsibilities for pension plans that may be deficient in some aspect of the governing rules and regulations. (Do you know any plans that are not?)

Don't expect 98-22 to be an easy read. One has to bring a considerable amount of background to it; and even then one has to bear down very hard to keep in focus all the things that are going on within the four corners of 98-22, because the pension rules have become excruciatingly recondite, necessitating carrying in one's mind all kinds of hypertechnical formulae, dangling participles, conditions precedent and confusing cross- references that cannot be reduced to plain-talk even with the best of intentions. That said, the new procedure is still a very commendable piece of work; and it will become even more so in time as the Service incorporates various improvements that it has solicited its stakeholders to suggest. Yes, every one of you is a stakeholder.

This piece is not intended as a baedeker through the paths and thickets of 98-22, so much as heads-up to alert you to (1) its existence, (2) its best feature, and (3) its most problematic one. Item #1 has been accomplished in the preceding paragraphs. For item #2 I would submit the drastic reduction in sanctions applicable to a plan that endeavors to establish procedures designed to monitor and catch disqualifying circumstances, e.g.: failing to make timely amendments, or, having made them, to observe them in practice; violating plan loan constraints; not making timely distributions to participants reaching age 70 1/2 (or retiring, if later); excluding from coverage persons eligible under the plan terms, etc. The Service has accomplished this easing up of punishment by reshaping the program so that the sanction is more like a filing fee and calibrated to the magnitude of the deficiency, as contrasted with the original scheme under which a monetary sanction was geared to the amount of tax dollars a plan sponsor would have to pay to the IRS if the plan were disqualified. The result is much lower dollar amounts, as little as $500 for small plans, and no more than $70,000 for the very largest (a far cry from the millions of dollars in penalties possible before 98-22), except where the failures are deemed particularly egregious; and even there the sanction will not exceed 40 percent of the potential maximum tax exposure, if the plan sponsor prempts audit activity by approaching the Service first with a plan of correction.

My #3 item is the flip side of #2, because in its commendable effort to project a constructive rather than a punitive approach to compliance resolution, the Service may be undercutting its efforts to discourage abusive qualification failures even where coupled with a total absence of any attempt to voluntarily cure the defects. It is all very well to make the punishment fit the crime, and even to reward with light wrist slaps plans that voluntarily clean up their acts. But where the Service program provides an incentive to the calculatingly noncompliant plan (or to a plan so indifferent to the qualification prerequisites as to amount to constructive willfulness) to do nothing about plan defaults until caught up with on audit, that may be too much of a good thing. That could well be the consequence of the Audit CAP program -- that is, the process designed for cases where the plan sponsor has not initated an overture to the Service to fix its plan deficiencies until after an audit examination is commenced but is still able to wind up paying a monetary sanction considerably below the full tax cost of plan disqualification. That is tantamount to awarding the carrot without threat of the stick. There is insufficient inducement to avoid playing the audit lottery.

Rev. Proc. 98-22 does not actually spell out the means of arriving at the sanction in such cases, and certainly does not preclude the possibility that it would be very close to, or even the full amount of, the taxes that would be incurred by all the relevant taxpayers, i.e. , plan sponsor, pension plan, and all its participants. But some pension practitioners and sponsors are lately comforting each other with assurances that the newly gentler and kinder IRS, presumably cowed by all the beating it has been taking on Capitol Hill and in the press recently, will not be "throwing the book" much in the coming months and years. I must say I am less sanguine about that. Maybe I still am carrying the image of the Service that I had when I myself was one of the IRS policymakers in Washington some years ago.

Or maybe I just don't like the idea of being victimized by Gresham's Law (you know, the bad driving out the good), because while I am recommending that my clients act like good citizens, there are advisers out there telling theirs to "tough it out and we will get you out of trouble if the IRS comes knocking-" I expect Al Capone's advisers were telling him the same thing.

Alvin Lurie has looked at ERISA plans from both sides, having spent many years as a practicing pension attorney, appointed as the first person to administer the IRS' ERISA program in the National office in Washington.