In Revenue Procedure 2019-19, the Internal Revenue Service has expanded the Self-Correction Program (“SCP”) under the Employee Plans Compliance Resolution System (“EPCRS”) so that certain plan document failures and plan loan failures may be self-corrected, rather than corrected by filing for approval and paying fees under the Voluntary Correction Program (“VCP”) or negotiating under the more complicated and expensive Audit Closing Agreement Program of the EPCRS. Revenue Procedure 2019-19 is effective as of April 19, 2019, and updates, modifies and supersedes Revenue Procedure 2018-52, which was the most recent consolidated statement of the correction programs under EPCRS.
Under Rev. Proc. 2019-19, a sponsor of a tax-qualified or Code Section 403(b) plan may use SCP to correct certain plan document failures (that is, a plan provision that on its face violates Internal Revenue Code Section 401(a) or 403(b) - other than the initial failure to adopt a qualified plan or timely adopt a written 403(b) plan), provided the plan at the time of correction is subject to a favorable determination, advisory or opinion letter from the IRS (a “Favorable Letter”), and the correction is made within the SCP correction period for “significant” failures (in general, before the end of the second plan year after the failure occurred).
In addition, Rev. Proc. 2019-19 allows: (i) an operational failure to be corrected by plan amendment if the plan amendment results in an increase in a permissible benefit, right or feature available to all eligible employees, and the amendment complies with the general correction principles of EPCRS; and (ii) certain plan document failures to be corrected by plan amendment if the plan is subject to a Favorable Letter and is corrected within the applicable correction period for significant failures.
Rev. Proc. 2019-19 also permits certain plan loan failures to be corrected under SCP, and provides that (a) errors relating to defaulted loans may be corrected under SCP (by a single sum repayment, re-amortization of the outstanding loan balance or both, as under VCP); and (b) that if correction of a plan loan failure is not made, resulting in a deemed distribution to the borrower/participant that must be reported on Form 1099-R, the plan sponsor may report the deemed distribution in the year of correction (vs. the year of the failure) without first having to request that reporting relief. Further, Rev. Proc. 2019-19 provides for a new correction method for a failure to obtain spousal consent for a loan, as well as a plan amendment correction method for granting plan loans in excess of the number of loans permitted under the plan.
Self-correction under Rev. Proc. 2019-19 is not without certain conditions, limitations and pitfalls for the unwary.