On August 14, 2008, the Internal Revenue Service (“IRS”) issued Revenue Procedure 2008-50, which updates the Employee Plans Compliance Resolution System (“EPCRS”) set forth under Revenue Procedure 2006-27. As described below, the changes made under the new EPCRS are good news for plan sponsors. The new EPCRS gives plan sponsors clearer guidance regarding corrections of plan failures, reduces the Voluntary Correction Program (“VCP”) fees for certain plan failures, and expands the scope of the self-correction program (“SCP”).
The provisions of the new EPCRS are effective January 1, 2009. However, plan sponsors can apply the provisions of the new EPCRS on or after September 2, 2008.
The changes made under the new EPCRS include the following:
- Loans made in excess of the maximum amount allowed by Section 72(p) of the Internal Revenue Code of 1986, as amended (the “Code”) (the lesser of 50% of a participant’s account balance or $50,000), or for a period longer than otherwise permitted under Section 72(p)(2) of the Code can be corrected.
- The opportunity to correct insignificant plan failures under SCP during audit is expanded.
- Under the current EPCRS, corrective distributions equal to $50 or less are not required to be made. The new EPCRS increases the threshold to $75.
- Under the current EPCRS, if the plan sponsor corrects a plan failure under the VCP and the total amount of an overpayment made to a participant is $100 or less, the plan sponsor is not required to seek the return of the overpayment from the participant and is not required to notify the participant that the overpayment is not eligible for favorable tax treatment. This provision was not available to plan sponsors if the correction was made under SCP. The new EPCRS expands this provision to apply to corrections made under SCP.
- If the plan sponsor cannot make a reasonable estimate of the plan’s earnings, the plan sponsor can use the Department of Labor’s on-line calculator under its Voluntary Fiduciary Correction Program to calculate earnings.
- Under certain circumstances, a plan sponsor can request relief from the 10% additional income tax on early distributions.
- The new EPCRS expands the scope of the streamlined VCP submissions to include correction of the following failures:
- Untimely adoption of optional statutory changes;
- Loans made to plan participants that do not comply with Section 72(p) of the Code;
- Failure to timely distribute excess deferrals to plan participants; and
- Failure to timely make required minimum distributions.
- The new EPCRS amends the VCP fees for the following failures:
- The VCP fee for a failure to adopt timely interim amendments or amendments required to implement optional law changes is $375; •
- The VCP fee for the failure of participant loans to comply with the requirements of Section 72(p)(2) of the Code is reduced by 50%, provided that the failure does not affect more than 25% of the participants in the plan and the failure is the only failure of the VCP submission; and
- For egregious and intentional failures, the fee is the greater of (i) the standard VCP fee applicable to the plan, or (ii) an amount equal to a negotiated percentage of the Maximum Payment Amount, with such percentage not to exceed 40%.