The latest news in benefits law focuses on the changes made in mid-April by the IRS when new rules for Employee Plans Compliance Resolution System (EPCRS) went into effect. These rules expand the disqualifying defects that are handled internally, without IRS filing or user fees, through the Self-Correction Program (SCP). Tax-qualified retirement plans run into problems with the IRS's qualification guidelines due to operational issues when a plan is not running according to its documentation. There are also documentation failures that occur when a plan document is not updated or amended to reflect continually changing laws and regulations.
Of particular interest are disqualifying defects that render a plan no longer tax qualified. Historically, corrections to plan documentation primarily occurred through either Audit CAP, the Voluntary Correction Program (VCP), or SCP. The latter two are available to companies to correct errors if they are not already in an IRS audit. VCP user fees are based upon net plan assets and range between $1,500 (for plans with net plan assets equal to $0-$500,000) and $3,000 (for plans with net plan assets equal to more than $500,000 to $10,000,000). Larger plans (with net plan assets in excess of $10,000,000) only face fees up to $3,500, so smaller plans will certainly get the most benefit from expanded SCP.
Expansion of SCPs
Plans interested in using SCP must first have established compliance procedures. If you have an operational failure, (a failure in which the plan is not operating in accordance with the plan document), you may be eligible for self-correction if:
- The correction method is a retroactive amendment to the plan document;
- That corrective amendment provides a benefit to participants (i.e. increases their account or prevents a corrective distribution); and
- The benefit provides a uniform increase in benefits, rights, or features to all employees eligible to participate in the plan.
Depending on the type of plan and the outlined process, going through the amendment process may take significant time and require notifying plan participants of major changes. It is generally easier, however, to modify a plan using an amendment than to make changes going through the VCP program or an IRS audit.
Types of Problems That May Now Be Addressed Via SCP
- Plan Document Failures: Plan documents must be regularly amended based on changes in the law and regulations issued by the IRS and other governing bodies. Plan administrators who missed a change or update deadline were able to correct the plan by filing a VCP, which could be expensive. The new rules permit retroactive self-correction provided the plan has a favorable determination letter, opinion, or advisory letter. Adopting SCP-qualified amendments must happen within two years of the original deadline to make the required amendment.
- Operational Failures: Plan administrators don't always operate plans in accordance with the written terms of the plan. These mistakes can be due to changes in personnel, changes in technology, or improved processes. Corrections include fixing the wording of certain provisions to make them compliant with regulations, adding necessary provisions, and removing those that are no longer necessary or allowed. There are often Required Amendments that must be added to certain plan types to remain qualifying, and these can be added through the SCP. Operational failures often result in employees not receiving the benefits to which they are entitled. If, on the other hand, failures result in a higher benefit for plan participants, and the plan sponsor is willing to continue providing this higher benefit, the mistake can be corrected via the SCP. The changes must ensure all eligible employees receive the higher benefit, and the correction must be in line with EPCRS correction procedures. Finally, the increased benefit cannot cause the plan to violate any qualification requirements. Operational issues also occur when a participant exceeds the number of loans permitted by the plan’s terms. The SCP will also allow for correction of plan terms via amendment, so long as the terms do not violate any qualification requirements. The increased number of plan loans must either be made available to all participants or solely to non-highly compensated employees.
- Plan Loan Failures: The new rules allow employers to correct issues with plan loans, specifically defaulted loans, via the SCP. This expansion is particularly important when loan failures are the result of the plan sponsor's actions rather than the participants. Employers no longer need to report the issue as a deemed taxable distribution. Under the SCP expansion, participants avoid tax issues so long as the plan provides a new amortization of the loan balance or the plan participant makes a payment to “catch up.” In some cases, however, filing a VCP may still be a good idea. Plan administrators may also use the SCP when a plan participant fails to obtain required consent from a spouse. If the spouse will not consent retroactively, a VCP filing is required for correction.
The expanded SCP went into effect on April 19 of this year. Additionally, as of April 1, 2019, VCP submissions must be made electronically at pay.gov .