On August 14, 2008, the Internal Revenue Service (“IRS”) published Revenue Procedure 2008-50 which updates and expands the Employee Plans Compliance Resolution System (“EPCRS”). The new guidance provided by Revenue Procedure 2008-50 modifies and supersedes previous IRS guidance and is effective January 1, 2009. However, plan sponsors are permitted to apply the provisions of the new revenue procedure on or after September 2, 2008.
EPCRS allows sponsors of tax qualified retirement plans 401(k), 403(b), SIMPLE IRAs and SEPs, to voluntarily correct technical and administrative failures and thereby continue to provide employees with retirement benefits on a tax favored basis. The components of EPCRS are the Self- Correction Program (“SCP”), Voluntary Correction Program (“VCP”) and the Audit Closing Agreement Program (“Audit Cap”).
Under Revenue Procedure 2008-50, the basic organization of EPCRS remains unchanged:
Self-Correction Program (“SCP”): Under SCP, a plan sponsor that has established compliance practices and procedures may, at any time without paying a fee or sanction to the IRS, internally correct insignificant operational failures. In addition, subject to certain limitations, significant operational errors may also be corrected. Generally, an operational failure results from the failure to follow the terms of the plan.
Voluntary Correction with Service Approval (“VCP”): VCP provides the general procedures for correcting qualification failures; operational, plan document, demographic and employer eligibility failures. VCP also provides the general procedures for correcting participant loan failures. Under VCP, a plan sponsor, at any time before being notified of an IRS audit, may pay a limited fee and receive the IRS’s approval of the plan sponsor’s correction. The revenue procedure sets forth various “pre approved” correction methods, but other correction methods may also be proposed. If a plan sponsor receives a compliance statement from the IRS under VCP approving the correction, the compliance statement is binding on the IRS and the plan sponsor.
Audit CAP: Audit Cap provides qualified plans a method to correct all failures found by the IRS on examination that have not already been corrected via SCP or VCP. Under Audit Cap, the plan sponsor corrects the failures and pays a sanction to the IRS. In accordance with the revenue procedure, the sanction imposed will bear a reasonable relationship to the nature, extent and severity of the failure, taking into account the extent to which the correction occurred before the IRS audit.
Although Revenue Procedure 2008-50 provides many updates, we have summarized below those updates or clarifications that may be of value to the Firm’s clients. The new revenue procedure:
- clarifies that in particular cases, the IRS may decline to make available one or more correction programs under EPCRS in the interest of sound tax administration;
- expands the correction method with respect to elective deferrals to include catch-up contributions and plans that provide the opportunity for an employee to designate all or a portion of elective deferrals as designated Roth Contributions;
- expands the correction method for failure to include an eligible employee in a 401(k) plan to include a situation in which the elective deferral and after-tax employee contribution election are not implemented by the employer or are implemented in a manner inconsistent with the plan terms;
- updates the definition of excess amounts and provides corrections for excess amount failures to include those arising from Section 415 violations and providing that the excess amount be placed in an unallocated account to be reallocated in lieu of employer contributions;
- clarifies that the earnings rate derived from the DOL’s Voluntary Fiduciary Correction Program’s online calculator may be used to determine the earnings adjustment applied to corrective contributions, distributions, allocations, and reallocations if it is not feasible to make a reasonable estimate of what the actual investments results would have been;
- provides that if the total corrective distribution due to a participant or beneficiary is $75 or less, the plan sponsor is not required to make the corrective distribution if the direct costs of processing the distribution would exceed the amount of the distribution; and
- provides sample applications for VCP filings.
Sample Applications For VCP Filings
The IRS significantly streamlined the VCP application procedures by providing specific schedules in Appendix F to address the most common plan failures. By providing specific schedules, which contain the information required by the IRS, the application completion and processing time should be reduced. The nine (9) schedules are:
Schedule 1: Interim and Certain Discretionary Nonamender Failures
Schedule 2: Other Nonamender Failures
Schedule 3: SEP and SARSEP Failures
Schedule 4: Simple IRA Failures
Schedule 5: Plan Loan Failures
Schedule 6: Employer Eligibility Failures
Schedule 7: Failure to Distribute Elective Deferrals in Excess of 402(g) Limits
Schedule 8: Failure to Pay Required Minimum Distributions
Schedule 9: Correction by Plan Amendment
According to Frank Del Barto, the sample applications for common plan failures should help ensure that submissions to the IRS are complete and provided in a consistent format, which should help reduce processing time. Having recently attended a webinar on the new correction program, Frank noted that the IRS representative (who co-presented the webinar) indicated that an approval of a plan sponsor’s application should be issued by the IRS within six to nine months of the submission.