On March 27, 2015, the Internal Revenue Service (the "IRS") released Revenue Procedure 2015-27 (the "Revenue Procedure"), which modifies the correction programs for retirement plan sponsors under the Employee Plans Compliance Resolution System ("EPCRS"). Plan sponsors should be aware that the IRS modified EPCRS for purposes of future plan corrections and, in particular, that the IRS modified the correction rules regarding repayment of overpayments by plan participants.
Brief Background on EPCRS: EPCRS provides retirement plan sponsors with correction programs designed to allow voluntary correction of plan failures in order to maintain the tax-qualified status of their retirement plans. Plan sponsors may self-correct plan failures in certain circumstances without IRS approval (i.e., under the "Self-Correction Program" or "SCP"), but must request IRS approval of the correction in other circumstances (i.e., under the "Voluntary Correction Program" or "VCP", or under the "Audit Closing Agreement Program" or "Audit CAP").
Correction of Overpayments: The Revenue Procedure modifies the correction rules regarding overpayments from retirement plans under EPCRS. An overpayment occurs when a retirement plan mistakenly pays a participant too much due to a plan administration error (e.g., a typo when calculating a participant's benefit) or an employee communication issue (e.g., a participant failing to tell the plan he or she became eligible for Social Security disability benefits in a plan with an offset provision). EPCRS states that a plan sponsor should take reasonable steps to have an overpayment (plus interest) repaid by the participant or beneficiary, except in the case of a small overpayment (i.e., $100 or less) or under the general EPCRS rule that any correction should reasonable and appropriate for the failure.
The Revenue Procedure clarifies that EPCRS does not require a plan sponsor to request that a plan participant repay an overpayment in all cases. Instead, the Revenue Procedure offers additional correction methods that may be appropriate in certain cases (e.g., where the overpayment results from a benefit calculation error), such as correction methods under which the employer itself contributes the amount of the overpayment plus interest to the plan, or the employer adopts a retroactive plan amendment conforming the plan document to plan operations.
The IRS requested comments regarding the correction of overpayments, including whether, and under what circumstances, EPCRS should require an employer to make the plan whole following an overpayment and whether plan sponsors need guidance on overpayment calculation errors and correction methods. The IRS intends to release additional guidance with respect to the correction of overpayments.
Q&B Key: Although, this change allows an employer to contribute the correction payment in some cases without going through a potentially lengthy and futile collection process, employers may be concerned that loosening the language on recoupment from a participant weakens their argument when demanding such repayment.
Reduced Fees: A plan sponsor must pay a compliance fee to the IRS when submitting a correction for IRS approval under VCP. This compliance fee is generally based on the number of participants in the applicable plan, and ranges from $750 for plans with 20 or fewer participants to $25,000 for plans with 10,000 or more participants. However, the IRS allows plans to pay reduced compliance fees in certain circumstances. The Revenue Procedure modifies EPCRS to provide reduced VCP compliance fees for the following two failures:
- Minimum Distribution Failures. The Revenue Procedure expands the ability of a plan sponsor to pay a reduced VCP compliance fee where the plan failed to satisfy the minimum distribution requirements under Section 401(a)(9) of the Internal Revenue Code (the "Code"). In order to take advantage of the reduced VCP compliance fee, the minimum distribution failure must be the only failure described in the submission and the failure must result in an excise tax under Code Section 4974. As modified by the Revenue Procedure, EPCRS now provides that a plan sponsor must pay $500 for minimum distribution failures involving 150 or fewer participants, and $1,500 for minimum distribution failures involving between 151 and 300 participants. Failures involving more than 300 participants require the general VCP compliance fee. Prior to the Revenue Procedure, EPCRS permitted a reduced VCP compliance fee for minimum distribution failures only if the failure involved 50 or fewer participants.
- Participant Loan Failures. The Revenue Procedure provides for a reduced VCP compliance fee for participant loan failures corrected in accordance with EPCRS if (1) the loan failure does not affect more than 25% of participants in any year in which the failure occurred and (2) the loan failure is the only failure described in the submission. The reduced compliance fee ranges from $300 for loan failures affecting 13 or fewer participants to $3,000 for loan failures affecting over 150 participants.
Determination Letter Filing Requirement under VCP: EPCRS requires a plan sponsor to submit a determination letter filing with a VCP submission in certain circumstances. The Revenue Procedure modifies EPCRS to clarify that the IRS will not require that a plan sponsor file a determination letter application with its VCP submission if: (1) the submission involves a corrective amendment made to a prototype or volume submitter plan, provided the employer continues to have reliance on the prototype or volume submitter plan opinion or advisory letter following adoption of the amendment, or (2) more than twelve months have passed since the plan distributed substantially all plan assets following plan termination.
The Revenue Procedure also extends the date by which a plan sponsor must adopt a corrective plan amendment to the later of 150 days after the date of the IRS compliance statement or 91 days after a favorable determination letter is issued (provided EPCRS required that the determination letter application be filed with the VCP submission).
SCP Eligibility and Excess Annual Additions: Many plan sponsors prefer to self-correct plan failures under SCP to avoid the time and expense of filing a VCP submission. In order to self‑correct plan failures, a plan sponsor must have established practices and procedures that are reasonably designed for compliance with the Code. Prior to modification by the Revenue Procedure, EPCRS provided that a plan sponsor was treated as having established practices and procedures to prevent a violation of Code Section 415(c) if excess annual additions were regularly corrected within two and one-half months after the end of the plan's limitation year. The Revenue Procedure extends that correction period to nine and one-half months after the end of the plan's limitation year.
Miscellaneous Modifications: The Revenue Procedure modifies EPCRS in order to "clean up" various old section references and delete outdated information. In addition, the Revenue Procedure clarifies that plan sponsors electing to use the IRS model documents for purposes of a VCP submission must complete the Form 14568 series of those documents and can no longer use the old model VCP filing documents.
Effective Date: The Revenue Procedure is generally effective July 1, 2015. However, plan sponsors can (and we suspect many will) apply the changes found in the Revenue Procedure immediately. Comments regarding the Revenue Procure are due to the IRS by July 20, 2015.
Link to Guidance: Revenue Procedure 2015-27 can be found here.