Authors, Eleanor Banister, Atlanta, +1 404 572 4930, firstname.lastname@example.org and James P. Cowles*, Atlanta, +1 404 572 3455, email@example.com
The IRS recently released new Employee Plans Compliance Resolution System (EPCRS) procedures. The new EPCRS procedures update procedures that were last issued in 2008 (the “2008 EPCRS”). Like the 2008 procedures, the new EPCRS permits three types of corrections, self-correction, voluntary correction with Internal Revenue Service (“IRS”) approval and correction on audit.
The changes to the 2008 EPCRS are described in the Chart of Significant Changes to EPCRS published by the IRS. The new procedures are effective April 1, 2013, but plan sponsors may begin using them now. This article describes a few of the more important revisions made to the 2008 EPCRS.
(1) New and Revised Model Forms
The IRS has developed several new forms that must be used to make application under the Voluntary Correction Program (VCP). All VCP submissions must now include a completed Form 8950 (Application for Voluntary Correction Program) and Form 8951 (Compliance Fee for Application for Voluntary Correction Program Submission Under EPCRS). Most of the information the IRS requires in connection with a VCP application is now incorporated into these forms, which are available on the IRS website.
The IRS has updated the model VCP submission documents in Appendix C of the ERCRS (Model VCP Submission Documents), including a new model compliance statement and schedules describing standardized descriptions of failures and corrections. The new schedules replace the “streamlined application” process that was previously contained in Appendix F of the 2008 EPCRS. The schedules address nonamenders, plan loan failures, eligibility failures, failure to distribute excess deferrals, and minimum distribution failures. The applicant is not required to use the model documents, but if they are used, they may not be modified.
(2) 403(b) Plan Corrections
EPCRS is now available to 403(b) plans in substantially the same manner as it is available to qualified plans, including the Self-Correction and VCP programs. The compliance fee for failure to adopt a written plan has been reduced by 50% for VCP applications mailed to the IRS by the end of 2013.
(3) 457(b) Plan submissions
Submissions relating to IRC 457(b) plans will be accepted on a provisional basis outside EPCRS, but with standards similar to EPCRS. The program will generally be limited to funded plans sponsored by governmental entities, but unfunded IRC 457(b) plans maintained by non-governmental tax exempt entities may be considered if the plan was erroneously established to benefit non highly compensated employees.
(4) Section 436 Overpayments
The new EPCRS added the ability to correct benefits paid from defined benefit plans in excess of the benefit limitations of IRC 436. Payment of benefits exceeding the IRC 436 limitations will be treated and corrected as overpayment failures. The EPCRS also provides relief from IRC 436 for other corrective distributions from a defined benefit plan if the plan sponsor makes a special contribution to the plan to make the distribution.
(5) Locating Lost Participants
EPCRS provides additional clarification and methods of locating lost participants, including certified mail to the individual’s last known address, use of the Social Security letter forwarding program, a commercial locator service, a credit reporting agency, or other internet search tools. References to the IRS letter forwarding program have been removed because such program is no longer available.
(6) Clarification of when a Favorable Determination Letter Application is Required
A Favorable Determination Letter application must be filed with a VCP application or during Audit CAP if the plan sponsor is proposing to correct:
an operational failure corrected by plan amendment within 12 months prior to the end of the plan’s remedial amendment cycle or in connection with a plan termination or
the failure to amend the plan for a disqualifying provision within the applicable remedial amendment period.
A Favorable Determination Letter application is no longer required or permitted for a VCP submission for:
failures to timely adopt good faith, interim or optional law change amendments (unless submitted within 12 months of the end of the plan’s remedial amendment cycle or in connection with plan termination);
demographic failures (i.e. nondiscrimination testing failures);
plan document failures corrected with IRS pre-approved plan documents; and
failure to adopt amendments required under the terms of a favorable determination letter.
(7) Corrections for Improperly Excluded Employees
The plan sponsor is no longer required to contribute a qualified nonelective contribution (QNEC) to correct a failure to make a matching contribution to a non-safe harbor plan. Instead the plan sponsor may make an employer nonelective contribution that is subject to the vesting schedule for matching contributions in the plan.
(8) Corrective Employer Contribution for Overpayments may not be Required
Under the 2008 EPCRS, the plan sponsor was generally required to make a contribution to correct an overpayment that a participant refused to repay to the plan. The EPCRS clarifies that a corrective contribution is not required if the Overpayment error arose in connection with a premature distribution from a defined contribution plan provided the distribution was otherwise made in accordance with plan terms. For example, a plan sponsor would not be required to make a corrective contribution for an in-service distribution prior to age 59 ½ if the plan otherwise permitted distributions upon the attainment of age 59 ½.
Like under the 2008 EPCRS, early correction is easier to accomplish. King & Spalding would be glad to discuss your plan’s operational and documentary compliance errors and to assist you in correcting those errors under the EPCRS.
*Non-lawyer Employee Benefits Consultant