Practitioners and plan administrators are celebrating the arrival of several helpful revisions in a newly updated Internal Revenue Service (IRS) Employee Plans Compliance Resolution System (EPCRS) Revenue Procedure 2019-19.
The updated procedure for correcting mistakes in qualified retirement plans makes several minor revisions, updates, and clarifications to EPCRS, but also significantly expands self-correction opportunities in two key areas through the self-correction program (SCP).
First, the new procedure expands the set of plan mistakes that can be corrected by plan amendment through SCP, which does not require an IRS filing, a user fee, or IRS approval to complete. Second, it provides practical solutions for correcting certain plan loan failures. These advancements are discussed below.
Overview of EPCRS
The IRS EPCRS revenue procedure gives an opportunity for sponsors and administrators of tax-qualified retirement plans to correct plan mistakes. EPCRS identifies two broad categories of mistakes: documentation failures and operational failures.
Document failures occur when the plan document contains, or fails to contain, any provision that disqualifies the plan on its face. An operational failure arises from the failure to follow plan provisions. (Other types of failures include demographic failures and employer eligibility failures, which are less important when discussing the new EPCRS changes because they remain ineligible for correction through SCP).
EPCRS prescribes several broad correction principles for correcting plan mistakes, and also sets forth many specific methods for correcting a variety of specific plan document and operational failures. EPCRS also prescribes three different programs for making plan corrections.
SCP, as its name suggests, allows plan sponsors and administrators to correct plan mistakes on their own without applying to the IRS to approve the correction. If a particular failure is eligible for SCP and the sponsor or administrator follows the principles and methods set forth in EPCRS, then the IRS will not treat the plan as disqualified because of the failure.
Under the EPCRS Voluntary Correction Program (VCP), plan mistakes are corrected by making an application to the IRS, paying a user fee, and receiving IRS acceptance of the proposed correction. (See related column on Page 2 about April changes that now require VCP submissions to be electronic.)
The correction on audit (Audit CAP) program under EPCRS is used when plan mistakes are discovered upon audit by the IRS and have not been corrected by SCP or VCP. Generally, the methods used to correct mistakes under Audit CAP are accompanied by fines, penalties, and excise taxes that may exceed VCP user fees or the costs of SCP. The incentive is for sponsors and administrators to correct plan mistakes on their own, before being discovered by the IRS.
Insignificant operational failures are eligible for SCP anytime, including while the plan is under audit. Correction of significant operational failures must be completed, or substantially completed, before a plan is under audit or, if earlier, before the end of the second plan year following the plan year in which the failure occurred. Also, to be eligible for SCP, a plan must have received a favorable determination letter and have established practices and procedures that are designed to promote and facilitate overall compliance in form and operation with plan qualification requirements.
Self-Correction Through Plan Amendment
The new EPCRS provides expanded opportunities to correct plan mistakes through SCP by plan amendment. Under prior EPCRS, no plan document failure could be corrected through SCP. All plan document failure corrections had to be sent to the IRS for approval under VCP, although the IRS had previously prescribed a streamlined process for correcting certain document failures and paying a reduced user fee.
However, this reduced user fee for streamlined applications was eliminated in 2018 when the IRS announced a new user fee structure in Revenue Procedure 2018-4 (see January 2018 story). In addition, only a limited list of specified operational failures could be corrected through SCP. Rev. Proc. 2019-19 makes correction of certain plan document failures possible through SCP, and also allows self-correction of a broad category of operational failures discussed below.
Self-correction of Plan Document Failures by Amendment
Previously, if a plan discovered it had failed to adopt a plan amendment that was required by a change in the qualification requirements (an “interim amendment”), SCP was not an option, and a VCP application was required to make the correction. Now under Rev. Proc. 2019-19, plan document failures that otherwise meet the requirements for SCP may be self-corrected without filing a VCP application.
But there are important limits to SCP. EPCRS provides that all plan document failures are significant, meaning that SCP is only available if the interim amendment is adopted no later than the end of the second plan year following the plan year in which the missed adoption deadline expired. If this deadline has passed, plans will need to apply for IRS approval through VCP to rely on the relief EPCRS affords. Also, SCP is not available to correct the initial failure to adopt a plan document, or the failure to timely adopt a written 403(b) plan. A plan must also meet the general SCP eligibility procedures by having a favorable determination letter and compliance practices and procedures in place.
Self-correction of Operational Failures by Plan Amendment
Under the prior EPCRS, adopting a plan amendment to conform the terms of the plan to its prior operation was allowed only in three limited circumstances:
- A defined contribution plan could be corrected by amendment if it allocated contributions or forfeitures based on a participant’s compensation that exceeded the compensation limit under Section 401(a)(17) of the Internal Revenue Code.
- A defined contribution plan that allowed hardship withdrawals or plan loans from a plan whose terms did not allow for them could be amended to conform the plan to the practice.
- If a plan allowed an employee to participate before meeting the plan’s age and service requirements or before the plan’s specified entry date, the plan could be amended to allow for this early participation.
If a plan adopted any of these amendments through SCP, it was required to disclose these amendments in its next determination letter application—that is, until the IRS significantly curtailed the determination letter process for most individually designed plans (see related story on Page 3).
Under the new EPCRS, a broad category of operational failures may now be eligible for SCP through adoption of a retroactive plan amendment to conform the terms of the plan to its prior operation. Correction of both significant and insignificant operational failure can be made by plan amendment if three conditions are met:
- The plan amendment must increase a benefit, right, or feature;
- The increase in the benefit, right, or feature must be available to all eligible employees; and
- Providing the increase in the benefit, right, or feature must be permitted under the federal tax code and satisfy the EPCRS general correction principles.
It is not clear under EPCRS exactly what would qualify as an increase in a benefit, right, or feature. IRS officials have reportedly indicated, although only informally, that the concept is likely broader than a benefit, right, or feature as defined under Treasury Regulation Section 1.401(a)(4)-4 for nondiscrimination testing purposes under Code Section 401(a)(4).
Additional guidance may be needed for clarity on what amounts to a benefit, right, or feature for EPCRS SCP purposes, but at a minimum the amendment would have to provide something to the participants that was not set forth in the plan. For example, a retroactive plan amendment under SCP would not be allowed to correct an operation failure where the plan failed to provide a benefit that was promised under the terms of the plan.
Self-Correction of Plan Loan Failures
The new EPCRS makes SCP available for correcting a plan loan default if done within that loan’s original statutory maximum loan period (5 years or possibly greater for home purchase loans) using methods that were previously only available through VCP or Audit CAP. Procedures for treating loans as distributions are set forth in Treasury Regulation Section 1.72(p)-1. Under those provisions, a loan is deemed distributed when an installment payment is missed and defaults if missed payments are not paid within any cure period specified in the plan document or, if earlier, the last day of the calendar quarter following the quarter in which an installment payment is missed. A defaulted loan may be offset against the participant’s account balance. Upon default, the plan should report the taxable distribution for the unpaid loan balance on IRS Form 1099-R.
Now, a plan loan default may be corrected under SCP by having the participant make up the missed payments with a lump-sum payment, re-amortizing the outstanding loan balance over a period not to exceed the loan’s original maximum loan period, or any combination of the two. Previously these options were only available under VCP or Audit CAP. However, the new EPCRS points out that a plan wishing to participate in the U.S. Department of Labor’s (DOL) Voluntary Fiduciary Correction Program (VFCP) will still need to go through the IRS’ VCP and obtain a compliance statement to meet the requirements for VFCP.
The new EPCRS also prescribes additional specific situations for correcting common plan loan failures. First, if a plan subject to the qualified joint and survivor annuity rules makes a plan loan to a participant without obtaining the participant’s spouse’s consent, a plan may self-correct by simply notifying the participant and spouse and obtaining the spouse’s consent retroactively. If the plan is unable to obtain the spouse’s retroactive consent, then correction must occur through VCP or Audit CAP.
Second, if a plan makes multiple loans to a participant in excess of the number of loans allowed by the terms of the plan, a plan may self-correct by adopting a retroactive amendment conforming the plan to its operation—as well as all statutory requirements—if the loans are available either to all participants or solely to one or more nonhighly compensated employees (NHCEs).
SCP is still not available to correct loan failures that exceed certain statutory requirements of Code Section 72(p)(2), including the maximum loan limit of $50,000 (or in certain circumstances a lesser amount), the maximum permissible loan period (5 years for non-home purchase loans), or the level amortization requirements. These failures still must be corrected through VCP or Audit CAP.
Reporting also was made easier in the new EPCRS. Under the prior EPCRS, if a plan loan failure required the plan to deem a loan and report the taxable distribution on Form 1099-R, and if the correction was made through SCP, the only option was to issue the 1099-R for the year of the failure, rather than the year of correction. This created potential problems for participants, and may have required them to file amended tax returns for previously filed years to account for the additional income. Plans were allowed to
correct loan failures as described above and not issue a 1099-R, or issue a 1099-R for the year of the correction, only if it participated in VCP or Audit CAP and specifically requested that relief. Now these options are available if a correction is done through SCP.
The new EPCRS includes significant enhancements to the correction procedure, consistent with its stated goal of encouraging self-compliance with the qualification rules. Sponsors and administrators wishing to take corrective actions should carefully review the new requirements to make sure the particular plan error is eligible for the correction, and that the chosen correction complies with the new requirements, as well as all other EPCRS correction principles and tax code requirements.
Todd B. Castleton is counsel with Kilpatrick Townsend & Stockton’s Employee Benefits Practice in the firm’s Washington, D.C., office, where he leads the Qualified Retirement Plans team. He is a contributing editor of The 401(k) Plan Handbook, and formerly was contributing editor of the Guide to Assigning & Loaning Benefit Plan Money.