The Employee Plans Compliance Resolution System (“EPCRS”), as set forth in Revenue Procedure 2021-30, allows plan sponsors to correct “Qualification Failures,” which are defined as any plan document, operational, demographic or employer eligibility failures. Failure to follow the terms of a plan constitutes an operational failure.

Operational Failures can be corrected without IRS supervision under the Self-Correction Program (“SCP”) of EPCRS without paying a fee or sanction in two circumstances: (1) insignificant operational defects can be corrected at any time, even if the plan is under an IRS audit; and (2) significant operational defects can be corrected by the end of the third plan year following the plan year in which the defect arose. EPCRS summarizes the factors a plan sponsor may use to determine if a failure is insignificant or not. Moreover, SCP is only available if the plan sponsor has established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Internal Revenue Code requirements, and the failure occurred through an oversight or mistake in applying the procedures or because the procedures were not sufficient to prevent the occurrence of the failure.

The SCP rules were expanded under the SECURE 2.0 Act, and the IRS issued guidance (Notice 2023-43) in the form of questions and answers, which allows plan sponsors to self-correct defined eligible inadvertent failures, and provides interpretative guidance on this type of correction prior to any official amendment to the EPCRS program. Qualification failures eligible for self-correction are limited to operational failures and certain plan document failures.

Although the SCP program does not require a plan to retain any special documentation, we advise plan sponsors to create and retain documentation of the correction, including a description of the failure, an explanation of the plan’s eligibility for SCP, and the steps taken to correct the failure.