On Friday, the IRS issued Revenue Procedure 2021-30 expanding the Employee Plans Compliance Resolution System (“EPCRS”)—a voluntary program for correcting errors in tax-qualified and section 403(b) plans—by adding two new methods for recouping benefit overpayments, among other changes. The revenue procedure, which is generally effective July 16, 2021, is welcome news for retirement plans, particularly defined benefit plan sponsors and administrators who have long advocated for more expansive overpayment correction options.
Under EPCRS, retirement plan sponsors can correct certain operational and plan document failures that might otherwise adversely affect the tax favored status of the plan, including benefit overpayments. Overpayments are typically corrected by recouping the overpayment with earnings so that the plan is made whole. In 2015, the IRS clarified that overpayments could be recouped from the plan sponsor or another party, as opposed to requiring that they be recouped directly from the participant or beneficiary. This new EPCRS revenue procedure adds two more options for correcting overpayments.
First, the new “contribution credit correction method” takes into account changes in the plan’s funding requirements related to the overpayment. Under this new correction method, the amount of an overpayment that must be repaid to the plan is reduced by the cumulative increase in the plan’s minimum funding requirements attributable to the overpayment during a specified period. This includes the increase attributable to the overstatement of liabilities. Certain other additional contributions in excess of minimum funding requirements also reduce the amount that must be repaid to the plan under this correction method.
Second, the new “funding exception correction method” provides that corrective payments are not required if the plan satisfies a certain funding level. This funding exception correction method applies to defined benefit plans that are subject to Internal Revenue Code section 436, and hence is not applicable to governmental plans and non-electing church plans.
The revenue procedure also includes a number of other important EPCRS changes, as follows:
The new guidance will streamline the correction process for plan sponsors and administrators, and ease the burden on plan participants and beneficiaries.