On April 19, 2019, the IRS released Rev. Proc. 2019-19, which significantly expanded the types of plan qualification failures that can be self-corrected under the Employee Plans Compliance Resolution System (“EPCRS”).

EPCRS contains two basic correction methods. Under the Self Correction Program (“SCP”), if certain requirements are met, significant and insignificant failures can be corrected without applying to the IRS or paying a user fee. Under the Voluntary Compliance Program (“VCP”), the plan sponsor must submit an application to the IRS and pay a user fee before the IRS will review and approve a correction. This new guidance expanding the SCP is effective immediately and may provide plan sponsors with new means to address plan document failures, plan operational failures, and loan defaults. The guidance applies to qualified plans (i.e., 401(k) plans) and 403(b) plans.

Plan Document Failures

One type of plan document failure occurs when a plan is not timely amended to comply with current law. Previously, all plan document failures could only be corrected through VCP.

Under the expanded SCP, a plan sponsor can correct certain plan document failures by retroactively adopting a plan amendment if the plan has received a favorable determination letter from the IRS (or favorable advisory/opinion letter from the IRS in the case of pre-approved plans). The correctable document qualification failures include “nonamender” failures, failures to adopt good faith amendments, and failures to adopt interim amendments. Furthermore, the corrective plan amendment must be adopted no later than the last day of the second plan year following the year in which the plan amendment should have been adopted. For example, an interim plan amendment that was required to be adopted by December 31, 2019, can be corrected under SCP by adopting a retroactive plan amendment by December 31, 2021.

Note that this SCP correction is not available for discretionary plan amendments that are not required by law.

Plan Operational Failures

A plan operational failure occurs when the operation of the plan does not align with the written terms of the plan. “Insignificant” operational failures can be corrected under SCP at any time, and “significant” operational failures can be corrected under SCP within 2 years of the failure. Under the new rules, plan sponsors can now correct operational failures by retroactively amending the plan document to conform to the actual operation of the plan only if the following three criteria are satisfied:

• The amendment results in an increased (not decreased) benefit, right or feature;
• The increased benefit, right or feature applies to all employees eligible to participate in the plan; and
• Providing the increased benefit, right, or feature does not violate any other qualification requirement and is in accordance with the general correction principles of the EPCRS.

The IRS states on its website that the retroactive plan amendment also must provide a “uniform” increase in benefits, rights or features to all employees eligible to participate in the plan. It remains to be seen how broadly the IRS will interpret the above provision regarding self-correction of plan operational failures by plan amendment.

Plan sponsors who wish to correct operational failures by plan amendment under SCP must still determine whether an operational failure is “insignificant” or “significant.” As with any other self-correction, “insignificant” failures can be corrected at any time while “significant” failures must be corrected within two years of the failure. “Egregious” operational errors cannot be corrected under SCP and can only be corrected under VCP or the Audit Closing Agreement Program (“Audit CAP”).

Loan Failures

Rev. Proc. 2019-19 expands plan sponsors’ ability to correct certain plan loan failures under SCP. As with any other self-correction, plan sponsors must evaluate whether the loan failure is an “insignificant” failure that can be corrected at any time or a “significant” failure that must be corrected within 2 years of the failure under SCP.

A. Default Loan Failures

Plan sponsors can now correct defaulted plan loans under SCP. Under the new rules, if the maximum 5-year repayment period for general loans has not expired, the plan sponsor can correct the failure under SCP by any of the following methods: (i) ensuring the participant makes a single lump sum “catch-up” loan repayment, plus interest, (ii) reamortizing the outstanding loan balance, plus interest, over the remaining payment schedule, or (iii) implementing a combination of (i) and (ii). If a loan default failure is corrected by any of these methods, any taxable deemed distribution to the participant is avoided. The availability to correct certain loan failures under SCP is significant because under the previous rules, plan sponsors were required to file a correction under VCP in order for the participant to avoid a taxable deemed distribution.

It is worth noting that the Department of Labor (“DOL”) will not issue a no-action letter to plan sponsors who self-correct defaulted loan failures under SCP. The DOL, however, will continue to issue no-action letters for corrections made under VCP or under Audit CAP.

Furthermore, loans that do not comply with the provisions of the Internal Revenue Code (such as general loans that originally exceed the 5-year repayment requirement or exceed the maximum loan amount) cannot be corrected under SCP and can only be corrected through VCP or Audit CAP.

B. Failure to Obtain Spousal Consent for Plan Loans

In addition to correcting certain defaulted loans, Rev. Proc. 2019-19 also allows plan sponsors who failed to obtain spousal consent for a plan loan (if such spousal consent is required for the loan) to correct the failure under SCP by obtaining spousal consent. However, if the plan sponsor is unable to obtain spousal consent, the failure must be corrected through VCP or Audit CAP.

C. Number of Plan Loans

Finally, if an operational failure occurs where the plan sponsor grants the participant more loans than allowed under the plan’s loan policy, plan sponsors can now correct the failure under SCP by retroactively amending the plan such that the terms of the written plan document align with the operation of the plan. For example, if the written plan document or loan policy only allows participants to take out one loan at a time and a participant erroneously takes out two plan loans, the plan sponsor can amend the plan or policy so that the plan or policy allows participants to take out two loans. A plan sponsor may make this correction under SCP if loans have been available to all participants or loans have been solely available to non-highly compensated employees.

Next Steps

The expansion of SCP is a welcome change. Plan sponsors have additional opportunities to self-correct plan failures without the administrative burdens and costs associated with filing under VCP. Plan sponsors may want to consider taking the following steps:

• Review plan documents for documentary compliance and determine whether a plan should be amended pursuant to a nonamender failure, a failure to adopt a good faith amendment, or a failure to adopt an interim amendment.
• Review plans for insignificant and significant operational failures and determine whether the failure can be self-corrected via retroactive amendment.
• Plan sponsors who are considering submitting corrections through VCP (especially those related to loan failures) may want to consider whether the failures qualify for correction under SCP, which could result in a more cost-effective way of resolving the errors.