On September 2, 2008, the Internal Revenue Service (IRS) issued Revenue Procedure 2008-50 which updated and expanded its comprehensive system of correction programs, the Employee Plans Compliance Resolution System (EPCRS), for retirement plans. The new EPCRS retains the basic structure of Revenue Procedure 2006-27, the predecessor to Revenue Procedure 2008-50, but makes a number of enhancements and expansions to the prior version of EPCRS.


By way of background, EPCRS is designed to assist sponsors of retirement plans to voluntarily correct certain errors that, if uncovered by the Internal Revenue Service (IRS) on audit, could lead to plan disqualification. Notably, the IRS generally takes the position that any plan error, no matter the size, is sufficient basis for plan disqualification. In this regard, the consequences of the disqualification of a retirement plan are as follows: (1) for open tax years, the employer loses its tax deduction for nonvested contributions made to the plan for such years; (2) for open tax years, participants recognize income with respect to their vested accrued benefits; (3) for open tax years, the plan’s underlying trust recognizes income on its earnings; (4) distributions from the disqualified plan are not eligible for rollover into another tax-qualified vehicle (i.e., all participant monies are subject to immediate taxation) and (5) the plan sponsor and/or the plan fiduciaries responsible for failing to maintain the plan’s tax-qualified status face the risk of lawsuits by participants who are forced to prematurely recognize income under (2) and (4) above.

The three components of EPCRS are: (1) the Self-Correction Program (SCP), which allows plan sponsors to correct certain “insignificant” operational failures without notifying the IRS or paying the IRS any compliance fee; (2) the Voluntary Correction Program (VCP), which allows plan sponsors to request IRS approval of a proposed correction and to pay a fixed compliance fee that is based upon the number of plan participants, provided the IRS has not yet identified the applicable failure on its own through the audit process or otherwise; and (3) the Audit based Closing Agreement Program (Audit CAP), which allows plan sponsors to correct failures during an IRS audit by means of a negotiation with the IRS of a correction methodology and compliance fee.

Updates and Expansions to EPCRS

The following items are the most significant ways in which the IRS updated and expanded EPCRS in Revenue Procedure 2008-50:

1. Failure to Include an Eligible Employee—The correction method for a failure to include an eligible employee in a Section 401(k) plan has been expanded to include a situation in which elective deferral contribution elections are not implemented by the plan sponsor or are implemented in a manner that is inconsistent with the plan’s terms. Specifically, a plan sponsor may correct such failure by making a corrective contribution for the employee’s missed opportunity to make elective deferrals and any missing employer matching contributions, including earnings. With respect to missed employee elective deferrals due to the plan sponsor’s failure to implement a participant election on a timely basis, the employer must make a contribution, adjusted for earnings, equal to 50 percent of the employee’s “missed deferral.” The missed deferral is calculated by multiplying the employee’s elected deferral percentage by the employee’s compensation for that year (reduced as necessary so that the missed deferral does not exceed plan limits, including the IRS’ annual limit on employee elective deferrals). With respect to any missing employer matching contributions, the employer makes a contribution, adjusted for earnings, equal to the matching contribution the employee would have received had the employee made a deferral equal to 100 percent of the missed deferral amount.

Prior to this expansion, because EPCRS applied this correction methodology only to situations involving a “failure to include” an otherwise eligible employee in the plan, many plan sponsors were uncomfortable applying it to situations in which elective deferral contribution elections were implemented in a manner that was inconsistent with the plan’s terms. Therefore, the typical correction for such an error was for the plan sponsor to make a contribution based upon the employee’s actual election that was erroneously processed. The revised EPCRS methodology eliminates the windfall such correction provided to such employee.

2. Earnings—Earnings adjustments for corrective contributions or distributions derived from the Department of Labor’s Voluntary Fiduciary Correction Program’s (i.e., a program designed to encourage employers to voluntarily comply with the Employee Retirement Income Security Act by self-correcting certain violations of such law) online calculator may be applied to corrective contributions, distributions, allocations and/or reallocations if it is not otherwise feasible to make a reasonable estimate of what the actual investment results have been. Previously, plan sponsors that were unable to calculate actual investment results were generally required to apply earnings based upon the plan’s “best performing fund.”

3. Streamlined Application Procedures—The current VCP rules provide a streamlined application procedure to correct a failure to adopt interim amendments and certain other legally required plan changes. The revised EPCRS provides new and expanded streamlined application procedures for (a) loans in excess of maximum amounts permitted by the Internal Revenue Code, (b) a failure to distribute elective deferrals in excess of Internal Revenue Code maximum annual limitations, (c) a failure to pay required minimum distributions, (d) certain corrections permitted to be made by plan amendment, (e) plan sponsor eligibility failures and (f) certain failures relating to simplified employee plans and individual retirement accounts.

4. Excise Taxes—Amounts improperly distributed to participants, which a participant has then rolled over to an IRA, are currently subject to a six percent excise tax under Section 4973 of the Code and may be subject to a ten percent excise tax on early distributions (if the participant was less than 59½ at the time of the distribution). However, the revised EPCRS states that, in appropriate cases, the IRS will not pursue such excise taxes relating to excess contributions made to IRAs if the recipient removes the overpayment and earnings from the IRA and returns them to the applicable plan.

5. Deminimus Corrections—Under the revised EPCRS, if the total corrective distribution due to a participant is US$75 or less (up from US$50 or less under the prior version of EPCRS), the plan sponsor is not required to make the corrective contribution if the reasonable direct costs of pursuing and delivering the distribution to the participant would exceed the amount of the distribution.

6. Expansion of the Availability of SCP for Substantially Complete Corrections—In order to qualify for correction under SCP, correction of a significant operational failure must be at least “substantially complete” prior to the IRS placing such plan under examination. In this regard, the revised EPCRS indicates that correction is substantially complete if it is at least 65 percent complete, down from 85 percent in the prior guidance.

7. Plan Loans—In addition to the extension of the use of a standardized VCP for some plan loan failures, Revenue Procedure 2008-50 make two other significant changes to facilitate plan loan corrections. First the definition of plan loan failures that can be corrected through EPCRS is expanded to include violations of the Internal Revenue Code Section 72(p) (i.e., the section of the Internal Revenue Code that provides exceptions from the tax that would otherwise be triggered by plan loans). In addition, the compliance fee for a plan is reduced by 50 percent, where (a) the only failure is the failure of plan loans to meet the requirements of such section 72(p) and (b) the plan loan failure affected no more than 25 percent of the plan participants.

8. Sample Application Form—A new sample application form is provided in Appendix D to EPCRS.

9. Contribution Failures—The definition of excess amounts within EPCRS has been updated and specified corrections have been provided for failures relating to excess amounts, including those that exceed the limitations in Sections 415 and/or 401(a)(17) of the Internal Revenue Code or that exceed plan-imposed contribution limitations.

10. Determination Letter Applications—The requirements for submitting a determination letter application when correcting certain qualification failures by plan amendment have been revised.

Effective Date

The updated EPCRS is generally effective January 1, 2009, but plan sponsors are free to apply its provisions beginning September 2, 2008. Because the changes to EPCRS are generally beneficial expansions, plan sponsors will want to utilize the revised EPCRS immediately.


The updates to and expansion of EPCRS are welcome changes available to plan sponsors and their advisors in maintaining tax-qualified status with respect to retirement plans. Because of the severe penalties associated with the disqualification of a tax-qualified retirement plan, to the extent a plan sponsor discovers any instance of noncompliance, legal counsel should be consulted to help ensure that such noncompliance is adequately fixed through EPCRS.