The IRS recently released an updated version of EPCRS, the IRS’s program for correcting errors that occur under tax-qualified retirement plans. The latest version of EPCRS makes it easier for plan sponsors to self-correct certain types of plan loan, operational and plan document failures without filing a VCP submission.
Late last month, the Internal Revenue Service (IRS) issued Revenue Procedure 2019-19, an updated version of the Employee Plans Compliance Resolution System (EPCRS), the IRS’s comprehensive program for correcting tax-qualified plan errors. The most recent update to EPCRS is designed to expand the types of failures that are eligible to be self-corrected. More specifically, the latest updates to EPCRS allow plan sponsors to self-correct certain plan loan and plan document failures, and to self-correct certain additional operational failures by adopting retroactive plan amendments. These changes are described below.
Self-Correction Now Available for Certain Plan Loan Failures
Plan loan failures are one of the most common plan-related errors. As a result, plan sponsors and administrators have long advocated that the IRS allow plans to self-correct loan failures outside of the Voluntary Correction Program (VCP), which requires a formal filing with the IRS and payment of a compliance fee. The most recent EPCRS update does just that, permitting self-correction of a number of loan-related failures:
Importantly, while the updated EPCRS provides welcome relief for plan sponsors who have long sought the ability to self-correct plan loan errors, not all loan failures can be self-corrected. In particular, plan loans that violate the tax code’s maximum dollar limit, the maximum loan period or the level amortization requirements may not be self-corrected. Instead, plan sponsors must use VCP to correct these errors. In addition, the Department of Labor allows certain prohibited transactions that result from defaulted loans made to parties in interest to be corrected under VFCP, but has not updated those rules to permit self-correction.
Self-Correction Also Available for Additional Operational and Plan Document Failures
The updated EPCRS also expanded the types of plan document failures and operational failures that may be self-corrected.
First, certain operational failures may now be corrected by adopting a retroactive plan amendment to conform the terms of the plan to plan operation. To do so, three conditions must be satisfied: (1) the amendment must result in an increase of a benefit, right or feature; (2) such increase must be available to all eligible employees; and (3) providing the increase must be permitted under the tax code and satisfy the correction principles of EPCRS. Importantly, it appears that self-correction for these types of failures still only applies to errors that are treated as “insignificant” by the IRS. Because plan sponsors may only use the retroactive amendment correction method if an error affects all eligible employees, it may be difficult to satisfy this requirement for operational errors that extend beyond two plan years (the period during which significant plan failures may be treated as insignificant and self-corrected).
Second, plan document failures, including the failure to timely adopt required or interim amendments, may now be self-corrected as long as the plan has a favorable determination or opinion letter from the IRS and the correction is made within the period required for self-correcting significant failures (typically two plan years). Importantly, the failure to timely adopt an initial plan document or a written 403(b) plan are not eligible for self-correction. In addition, the failure to timely adopt discretionary plan amendments also cannot be self-corrected.
Lastly, the updated EPCRS also expands the availability of self-correction to fix certain failures to obtain spousal consent for distributions other than plan loans.
The most recent revisions to EPCRS greatly expand the availability of self-correction for some of the most common plan failures. Like many other recent updates to EPCRS, these changes will help reduce the cost and burden of correcting many of the most common (and often minor) plan failures, and will provide welcome relief for many plan sponsors.