Effective April 19, 2019 the IRS issued favorable updates to its Employee Plans Compliance Resolution System (EPCRS). The updates increase the number of opportunities to use the EPCRS self-correction program for certain operational and plan document failures requiring plan amendments and certain loan failures.
The Self Correction Program (SCP)
In general, the self-correction program rules provide (1) “insignificant” failures can be corrected at any time, (2) eligible “significant” corrections must be corrected before the end of the second plan year after the failure occurred or substantially completed within a reasonable time, (3) the plan must have a favorable determination letter (or equivalent for 403(b) plans), (4) the plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance and (5) the error must not be “egregious”. Previously, SCP was only available for operational failure and a small number of related plan document corrections.
NOTE:In most cases, demographic and employer eligibility failures remain unavailable for SCP correction.
If SCP becomes or is unavailable, EPCRS allows for correction with IRS involvement through either a Voluntary Correction Program (VCP) submission or through the Audit Closing Agreement Program (Audit CAP). Access to the VCP program requires an expenditure of time and funds to prepare a submission and the payment of a fee based on total plan assets.
If Total Plan Assets are $500,000 or less the user fee is $1,500
If Total Plan Assets are 500,001 to $10,000,000 the user fee is $3,000
If Total Plan Assets are over $10,000,000 the user fee is $3,500
The improvements to SCP are welcome additions and potential cost savers. A sponsor, however, must be attentive to its plan’s terms and act promptly when an error is detected.
The new opportunities are outlined below.
Operational Failure Amendments
An operational failure now may be corrected by plan amendment under SCP if three conditions are met:
(1) the plan amendment results in an increase of a benefit, right, or feature,
(2) the increase in the benefit, right, or feature is available to all eligible employees, and
(3) the Code permits the increase in the benefit, right or feature
EXAMPLE: A 401(k) sponsor offers an otherwise compliant hardship withdrawal option that is not included in the plan document. A timely SCP corrective amendment is now available without involving the IRS.
The IRS indicates it will provide examples of self-amending opportunities on its web-site including any timing requirements when the failure is “insignificant”.
Plan Document Failure Amendments
A qualified plan or 403(b) plan also may now use SCP to correct a “Plan Document Failure” for an existing plan. Generally, a "Plan Document Failure" involves an incorrect of missing provision that violates the requirements of Code Section 401(a) or 403(a). Examples include nonamender failures, a failure to adopt good faith amendments, and a failure to adopt interim amendments. Failure to adopt a discretionary plan amendment is not considered a plan document failure. Likewise, a failure to adopt an initial qualified plan document may not be corrected under SCP.
Plan Loan Failures
Generally, plan loans are corrected under VCP, or Audit CAP or SCP depending on the circumstances. The 2019 EPCRS additions expand loan correction opportunities without IRS involvement.
Defaulted Loans. Defaulted loans may now be corrected under SCP by either a single sum repayment, re-amortization of the outstanding loan balance, or a combination of the two.
NOTE: If the loan correction also requires a submission under the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP) because, for example, the sponsor did not properly administer loan repayments, a no-action letter for a loan default failure corrected under VCP (not SCP) is still required by the DoL before it will issue its own VFCP no-action letter.
Reporting of deemed distributions. If a loan is not corrected, a deemed distribution is required. Previously a deemed distribution could only be reported to a participant on a Form 1099-R in the year of correction (instead of the year of the failure) if the sponsor specifically requested as much from the IRS through the VCP process. The new 2019 rules allow for deemed distribution reporting in the year of the correction under the SCP.
Failure to obtain spousal consent for a plan loan. The plan sponsor now may use SCP to notify the affected participant and spouse of the failure. A spouse can provide spousal consent without IRS involvement. If spousal consent is not obtained, the failure is corrected under either VCP or Audit CAP.
Correcting the number of plan loans available by plan amendment.
If the number of plan loans exceeds the number permitted under plan documentation, the sponsor may correct by plan amendment under SCP if:
(1) the plan as amended would have satisfied plan and loan qualification requirements under the Code when the plan loans were first made available, and
(2) plan loans in excess of the number permitted under the plan were available to either all participants, or solely to one or more participants who were non-highly compensated employees.
NOTE: VCP or Audit CAP still must be used (1) if plan loans are made in excess of the Code’s loan limits or (2) the plan terms do not conform to the Code’s loan requirements.