The Internal Revenue Service recently issued Revenue Procedure 2016-51, a new version of the Employee Plans Compliance Resolution System (EPCRS) to consolidate and update its prior guidance regarding how to correct of errors in qualified retirement plans. The new version of the EPCRS program also reflects changes that the IRS has made to its determination letter process.
The Internal Revenue Service (IRS) recently issued Revenue Procedure 2016-51, a new version of the Employee Plans Compliance Resolution System (EPCRS) to consolidate and update its comprehensive system for correction of retirement plan failures. The full revision of the EPCRS guidance comes as a welcome relief in contrast to the guidance that, until now, had been divided between Revenue Procedure 2013-12, Revenue Procedure 2015-27 and Revenue Procedure 2015-28. The prior guidance also contained outdated references to the IRS’s determination letter program, and old model forms for Voluntary Compliance Program (VCP) submissions. Revenue Procedure 2016-51 also makes changes to the user fees and sanctions and clarifies the significance of compliance statements issued after a VCP or Audit Closing Agreement Program (CAP). These changes are effective January 1, 2017.
Notable changes made by Revenue Procedure 2016-51 include:
Corrections for Elective Deferral Failures
Revenue Procedure 2016-51 incorporates Revenue Procedure 2015-28’s alternative safe harbor correction methods for elective deferral failures under a 401(k) plan or a 403(b) plan (for example, failure to correctly implement a plan’s automatic contribution or automatic escalation feature, or an improper exclusion of an eligible employee from the plan). Those correction methods, among other things, encourage early correction of deferral failures by making available two safe harbors which feature reduced corrective contributions by employers.
Corrections for Participant Overpayments
Revenue Procedure 2016-51 incorporates the revisions to EPCRS made by Revenue Procedure 2015-27. Those correction methods provide plan administrators with flexibility in correcting overpayments to participants, depending on the facts and circumstances, and eligibility to self-correct repeated excess annual additions as long as elective deferrals are returned to affected employees within nine-and-a-half months after the end of the limitation year.
Clarifications Related to Changes in IRS’s Determination Letter Program
One of the most important purposes of Revenue Procedure 2016-51 is to clarify how the changes to the IRS’s determination letter program affect the EPCRS program. Previously, a plan administrator’s ability to utilize certain aspects of the EPCRS program was conditioned on the plan having a current favorable determination letter. However, the IRS has significantly downsized its determination letter program for individually-designed plans by eliminating the five-year remedial filing cycle.
Revenue Procedure 2016-51 provides that the Self-Correction Program (SCP) will be available regardless of the status of the determination letter for individually designed plans. The guidance clarifies, however, that a VCP compliance statement should not be viewed as a determination that the terms of the plan satisfy the qualification requirements. In addition, determination letter applications are no longer accepted when plan sponsors correct a qualification failure by plan amendment, and determination letters should not be requested in anonymous submissions. The correction of interim amendment and non-amender failures must be made by the date of submission, and any corrective plan amendments must be adopted no later than 150 days after the date of the compliance statement.
Updated Fee Guidance
Starting with 2017, all user fees and rules relating to user fees for VCP submissions will be published in the IRS’s annual revenue procedure on user fees. Revenue Procedure 2016-51 also vests in the IRS the right to impose a sanction that is larger than the VCP user fee when there was a knowing egregious failure predominantly benefitting highly compensated employees. Revenue Procedure 2016-51 also clarifies that a sanction (in addition to the user fee) equal to 10 percent of the excess amount will apply when a failure involves an excess amount under a Simplified Employee Pension Plan (SEP) or a Savings Incentive Match Plan for Employee Individual Retirement Account (SIMPLE IRA), and the plan sponsor retains the excess amount in the plan.
Updated Audit CAP Sanctions
For failures corrected pursuant to the Audit CAP program, Revenue Procedure 2016-51 provides that the sanction will no longer be a negotiated percentage of the maximum payment amount (i.e., the tax the IRS could collect upon plan disqualification for all open tax years) but instead will be determined based on facts and circumstances (including the maximum payment amount, but also the type of failure, the reason for the failure, the steps taken by the plan sponsor to ensure that the plan had no failures and to identify failures, the number and type of employees affected by the failure, and the period over which the failure occurred). While this change should theoretically lead to a lower Audit CAP fee, the new revenue procedure makes clear that the Audit CAP sanction will not be less than the VCP user fee applicable to the plan.
Beginning in 2017, the VCP application forms will be provided on the IRS website, rather than as an appendix to the revenue procedure, allowing the forms to be updated without a full update to the EPCRS and its associated revenue procedures.
The restated EPCRS guidance continues to provide incentives for early correction of plan qualification errors. Plan sponsors should continue to self-audit plans in order to address issues that require correction as early as possible. Beginning in 2017, all corrective action should reflect the consolidated guidance provided in Revenue Procedure 2016-51, including the new forms and applicable fees.