Since 1998 the Internal Revenue Services (the “IRS”) has had a comprehensive employees plans correction program with three components: self-correction (SCP), voluntary correction with IRS approval including related user fee (VCP), and correction on audit with related penalties (Audit CAP). Each iteration of the Employee Plans Compliance Resolution System (EPCRS), currently set forth in Rev. Proc. 2021-30, has made it easier for plan sponsors and administrators to correct operational or plan document failures that adversely impact the tax qualification of the retirement plan. SECURE Act 2.0[1] significantly expands the EPCRS self-correction program.

SCP under Rev. Proc. 2021-30

Eligibility for the SCP is dependent on the Plan Sponsor or administrator of a plan having established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance in form and operation with applicable Internal Revenue Code requirements.  A plan document alone does not constitute evidence of established procedures. In order for a Plan Sponsor or administrator to use SCP, these established procedures must have been in place and routinely followed, and if an Operational Failure[2] or Plan Document Failure[3] occurred, it was through an oversight or mistake in applying them. SCP also may be used in situations in which the Operational Failure or Plan Document Failure occurred because the procedures that were in place, while reasonable, were not sufficient to prevent the occurrence of the failure.[4] Plans must have a determination letter or advisory letter for the form of plan document adopted in order to self-correct a Document Failure.

Insignificant and significant Operational and Document failures may be corrected under SCP.  There is no deadline for correcting Insignificant Operational and Document Failures.  Significant Operational or Document Failures must be self-corrected by the end of the last day of the third plan year following the year in which the failure occurred. Significant Operational or Document Failures discovered more than three plan years after the error occurred can be corrected under VCP.

SCP as modified by SECURE Act 2.0

SECURE Act 2.0 has blurred the distinction between insignificant and significant Operational and Document Failures. Since the enactment of SECURE Act 2.0 there is no deadline for self-correcting “any eligible inadvertent failure.” “Eligible Inadvertent Failure” is defined as any Operational or Document Failure that occurs despite practices and procedures being in place to avoid such failures.

The self-correction period will end if the IRS identifies an Eligible Inadvertent Failure prior to any action which demonstrates a specific commitment to implement self-correction. Such Failure will only be correctable through Audit CAP, which includes a penalty. Similarly, the self-correction period will be deemed to have ended prior to the actual completion of a correction, if the IRS determines that the self-correction of an identified Eligible Inadvertent Failure was not completed within a reasonable time after the error was identified. Such Failure will be required to be corrected through Audit CAP.

SECURE 2.0 also makes clear that “Eligible Inadvertent Failure” does not include any failure which is egregious, relates to diversion or misuse of plan assets or is directly or indirectly related to an abusive tax avoidance transaction.  Such failures may not be self-corrected.

SECURE 2.0 grants the IRS broad authority to issue guidance on correction methods that are required to be used to correct Eligible Inadvertent Failures.  Hopefully this guidance[5] will clarify what is required to “demonstrate a specific commitment to implement self-correction” and the factors that will determine whether an identified Failure has been corrected within a “reasonable time.”

Plan sponsors and administrators should not wait until this guidance is issued to take steps toward self-correction.  This is an excellent time to do a self-audit of retirement plan operations and determine whether there are any Operational or Document issues that need to be addressed.  For plan sponsors of Section 401(k) Plans the IRS offers a Checklist which is a good starting point for an internal review.

[1] SECURE 2.0 Act of 2022 (SECURE 2.0), enacted on December 29, 2022 as part of the Consolidated Appropriations Act of 2023

[2] The term "Operational Failure" generally means any failure that adversely affects the qualification of a plan that arises solely from the failure to follow plan provisions. See Rev. Proc. 2021-30 Section 5.01(b)

[3] "Plan Document Failure" means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of Internal Revenue Code § 401(a) or 403(a). See Rev. Proc. 2021-30 Section 5.01(a)

[4] Rev. Proc. 2021-30 Section 4.04

[5] While it is hoped that guidance will be issued sooner than later, SECURE 2.0 requires the guidance be issued no later than December 29, 2024.

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