On April 19, 2019, the IRS published Revenue Procedure 2019-19 regarding its Employee Plans Compliance Resolution System (EPCRS), the three-pronged correction program administered by the IRS. Using the EPCRS, plan sponsors are encouraged and allowed to correct plan failures and thereby continue to provide employees with retirement benefits on a tax-favored basis through the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) or the Audit Closing Agreement Program (Audit CAP).
Consistent with its policy to find, fix, and avoid plan errors, this latest iteration of the EPCRS most notably expands SCP making it easier for plan sponsors to self-correct certain plan document and operational failures, including plan loan failures. SCP permits a plan sponsor to correct these plan failures without contacting the IRS or paying a user fee. However, SCP is still not available to correct operational failures or plan document failures that are considered egregious.
Revenue Procedure 2019-19 modifies and replaces Revenue Procedure 2018-52, which was the most current IRS publication outlining the EPCRS, and is effective immediately.
Expanding Ability to Correct Certain Plan Document Failures under SCP
A plan document failure means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of Internal Revenue Code (Code). If otherwise eligible to correct under SCP, the plan sponsor of a qualified plan (including a 401(k) plan) or a 403(b) plan may correct certain plan document failures using SCP. The IRS has said that late adoption of discretionary amendments will not be considered a plan document failure. Furthermore, SCP is not available for failure to timely adopt an initial 401(a) plan document, failure to timely adopt an initial written 403(b) plan, or failure to timely adopt corrective amendments resolving demographic failures.
To correct plan document failures under SCP, certain requirements must be met:
- Because all plan document failures under SCP are to be treated as a significant failure, the correction must be substantially completed by the last day of the second plan year following the plan year in which the failure occurred. For example, for a plan with a plan year ending December 31, a plan document failure occurring in 2019 must be substantially corrected by December 31, 2021.
- As of the date of correction, the plan must be the subject of a favorable letter, which is subject to certain definitions depending on whether the plan is an individually designed or pre-approved qualified plan or a 403(b) plan.
Correcting plan document failures under SCP is not available for SEPs or SIMPLE IRAs.
Modifying Plan Loan Failures Corrections under SCP
Plan loans sometimes can be the bane of a plan administrator’s existence because of the high frequency of errors that can occur and because of the employee relations toll and sensitive messaging involved when errors do occur. Plan loan errors can result from payroll glitches, integrating new acquisitions, or other administrative errors. EPCRS and other programs have provided the framework for correcting some plan loan errors and the latest enhancements to the program should be hailed as welcome news.
Reporting Deemed Distributions. If a plan loan does not meet the exceptions of Code Section 72(p)(2) or is in default and is not corrected, then a deemed distribution should be reported in the year of the correction instead of the year in which the failure occurred. Revenue Procedure 2018-52 permitted, as part of VCP or Audit CAP, a plan sponsor to report the deemed distribution in the year of correction instead of the failure but only if the plan sponsor specifically requested that relief. A plan sponsor no longer needs to make such a request.
Defaulted Plan Loans. If a plan loan is in default, such failure can be corrected under SCP by: (i) the participant making a single lump sum payment that includes all missed payments, including accrued interest; (ii) reamortizing the outstanding loan balance, including accrued interest, over the remaining payment schedule of the original loan or the period remaining had the loan been amortized over the maximum period that complies with Code Section 72(p)(2)(B), as measured from the original date of the loan; or (iii) any combination of (i) or (ii).
Failure to Obtain Spousal Consent for Plan Loan. If there was a failure to obtain spousal consent prior to the attainment of the plan loan, then the failure can be corrected under SCP by notifying the affected participant and spouse (i.e., the spouse to whom the participant was married at the time of the plan loan) to obtain the spouse’s consent. Note: if spousal consent is not obtained, then the failure to obtain spousal consent must be corrected under VCP or Audit CAP.
Number of Plan Loans Exceeds Number Permitted by Plan Document. If the plan incurs an Operational Failure because a participant obtained a number of loans in excess of what the plan document permits, the failure can be corrected under SCP through a retroactive plan amendment conforming the plan document to the plan’s terms. Note: in order to be a permissible retroactive amendment, the following conditions must be met: (i) the amendment must satisfy Code Section 401(a); (ii) the plan as amended would have satisfied Code Section 401(a) (and the requirements applicable to plan loans under Code Section 72(p)) had the amendment been adopted when the plan loans were first made available; and (iii) plan loans (including plan loans in excess of the number permitted under the terms of the plan) were available to either all participants, or solely to one or more participants who were nonhighly compensated employees.
New Rules for Correcting by Plan Amendment under SCP
Previously a plan sponsor could correct an operational failure with a retroactive plan amendment to conform the terms of the plan to the plan’s prior operations for certain specified operational failures. Revenue Procedure 2019-19 adds new rules for self-correcting operational failures by plan amendment. Under the new correction rules, an operational failure may be corrected by plan amendment under SCP, including a plan amendment to reflect corrective action, if three conditions are met:
- The plan amendment would result in an increase of benefits, rights, or features,
- The increase in benefits, rights, or features is provided to all employees eligible to participate in the plan, and
- The increase in benefits, rights, or features is permitted under the Code and satisfies all other correction principles and applicable rules in the EPCRS.
If the operational failure did not provide for a uniform increase in benefits, rights, or features to all employees eligible to participate in the plan, SCP is not available to retroactively amend the written plan.
Certain plan document failures may also be corrected by plan amendment if the plan satisfies the conditions for self-correcting a plan document failure under SCP, as discussed above.
Other EPCRS Modifications
Spousal Consent. In addition to allowing correction for failures to obtain spousal consent under VCP, such failures may also now be corrected under SCP and Audit CAP.
SCP Examples. A link to the IRS website has been added for plan sponsors to go to for additional examples illustrating whether an operational failure is significant or insignificant for SCP purposes.
VCP Submissions. The transitional rules added by Revenue Procedure 2018-52 permitting paper VCP submissions to the IRS through March 31, 2019 have been removed. All VCP submissions must now be made electronically using pay.gov.