The IRS will implement the new Employee Plans Compliance Resolution System (EPCRS) rules on April 1, 2013. This new guidance is especially relevant for employers maintaining 403(b) plans.

Under the prior guidance (Rev. Proc. 2008-50), correction was available for 403(b) plans only for an error that violated a statutory requirement. Correction was not provided for an operational failure that violated a plan term but did not violate a statutory requirement or for a document failure. This was due, in part, because the 403(b) regulations that mandated a written plan and other requirements had not gone into effect when Rev. Proc. 2008-80 was released. This left 403(b) plan sponsors without a method to protect their plans if they discovered these errors. The new guidance in Rev. Proc. 2013-12 opens up, to some extent, corrective capabilities for 403(b) plans.

Under Rev. Proc. 2013-12, 403(b) plan sponsors may generally correct failures in the same manner as qualified plans, including errors with respect to plan document failures and failures to administer the plan in accordance with its terms. However, failures that occurred prior to 2009 are still subject to the limitations of the correction guidance under Rev. Proc. 2008-50. Set forth below is a more detailed explanation regarding the new correction procedures as they apply to Plan Document Failures and Operational Failures for 403(b) plans.

Plan Document Failures

Background - Prior to January 1, 2009, there was no written plan document requirement for 403(b) plans under the Internal Revenue Code (Code). This changed effective January 1, 2009, with the issuance of final regulations under Code section 403(b). In IRS Notice 2009-3, the IRS extended the deadline for adoption of a written plan document complyingwith Code section 403(b) and the regulations to December 31, 2009, provided that the 403(b) plan was maintained in operational compliance during 2009 . In addition, the IRS in Announcement 2009-89 provided for a remedial amendment period for correcting 403(b) plan document failures. The remedial amendment period applies if the plan sponsor adopted a 403(b) plan by December 31, 2009, that was intended to comply with Code section 403(b) and the regulations, and the plan sponsor either has adopted a prototype 403(b) plan that receives a favorable opinion letter from the IRS or applies for an individual determination letter for an individually designed 403(b) plan when that program becomes available. The remedial amendment period during which the plan sponsor can retroactively correct any plan document failures began on January 1, 2010. The IRS has not yet released guidance on the end of this remedial amendment period or on the individual determination letter submission process for 403(b) plans.

Rev. Proc. 2013-12 – As long as the remedial amendment period described in Announcement 2009-89 is applicable, a 403(b) plan will not have a Plan Document Failure during the period beginning on January 1, 2010, and ending on a date to be provided in future guidance, if the Plan Document Failure is corrected during the remedial amendment period by a retroactive plan amendment (i.e., retroactive to January 1, 2010). This is consistent with prior guidance and means no EPCRS submission is required.

If, however, a 403(b) plan sponsor did not timely adopt a written plan document, i.e., by December 31, 2009, the plan sponsor may make a written submission to the Voluntary Compliance Program (VCP) under EPCRS with respect to the document failure. If the plan receives a compliance statement under VCP or if a closing statement is issued as a result of an IRS plan audit, the plan will be treated as if it had been timely adopted for purposes of utilizing the remedial amendment period described in Announcement 2009-89. Neither the compliance statement nor the closing statement constitutes a determination of whether the 403(b) plan is compliant with Code Section 403(b) or the regulations. Like all other 403(b) plans, such plans will have to obtain favorable determination letters if individually designed or rely on favorable opinion letters in the case of pre-approved 403(b) plans to obtain such assurance with respect to document compliance.

Action Items with Respect to Plan Document Failures – 403(b) plan sponsors should consider doing the following:

  • Review 403(b) plan documents and contracts to assess compliance.
  • If any 403(b) plan document is not compliant with Code Section 403(b) and the regulations thereunder, determine whether the 403(b) plan can be retroactively amended to correct the plan document failure.
  • Adopt a pre-approved 403(b) plan that receives a favorable opinion letter from the IRS OR apply for a favorable determination letter for an individually designed 403(b) plan when the program becomes available.
  • If the employer did not adopt a 403(b) plan intended to be compliant by December 31, 2009, enter the Voluntary Compliance Program and obtain a compliance statement to treat the 403(b) plan as if it had been adopted timely.

Operational Failures

EPCRS is now available to correct any operational failure (i.e., a failure to follow plan provisions) that occurred on or after January 1, 2009. The correction methods are substantially the same as those used for qualified plans. However, for operational errors that occurred before January 1, 2009, 403(b) plans are limited to those failures included in the definition of 403(b) operational failures in the prior EPCRS guidance (Rev. Proc. 2008-50). The operational failures defined under the prior guidance generally related to specific Code provisions and included failures to satisfy the 401(a)(17) compensation limit, distribution restrictions, required minimum distributions, limits on elective deferrals, and rollover requirements. The failure to follow the plan’s terms alone did not fall under the prior guidance.

Thus, 403(b) plans with any Operational Failures that occurred on or after January 1, 2009, may correct the failures using either the self-correction program or VCP under EPCRS. (Note that in order to use self-correction, the plan sponsor must have practices and procedures that are reasonably designed to promote compliance, and if the failures are significant, self-correction is available only if the plan has a favorable determination letter (this requirement is discussed in the next paragraph). These procedures are only required with respect to failures occurring after December 31, 2009.) However, plan sponsors with errors that occurred before January 1, 2009, are left with the same dilemma when their failures do not fall into one of the 12 specific categories listed in the prior EPCRS guidance.

Favorable Determination Letter – As stated above, self-correction involving significant failures is available only if the plan has a favorable determination letter. Pending additional guidance, a 403(b) plan will be treated as having a favorable determination letter if the employer adopted a written plan document intended to comply with Code section 403(b) and the regulations on or before December 31, 2009 (or the date the plan is established, if later).

Information Sharing Agreements

The new guidance also addresses a failure that results from a vendor contract not being part of a 403(b) plan because an information sharing agreement is not in place for such contract as required by the Code and the regulations. In that case, plan sponsors may use the self-correction program or VCP as applicable and transfer the affected assets to a different vendor with whom contributions are being made and with whom an information sharing agreement is in place. Failure to make such a transfer will result in an ongoing operational failure.

457 Plans

EPCRS is still not officially available for 457 plans. However, in Rev. Proc. 2013-12, the IRS did indicate that governmental entities may submit correction applications for 457(b) plans based on standards that are similar to EPCRS. Generally, the same consideration is not provided for 457(b) plans maintained by tax exempt entities. That being said, the IRS did indicate that even tax exempt entities may be able to submit for correction if a 457(b) plan was mistakenly established for non-highly compensated employees and administered similar to a qualified plan.

Effective Date

The new EPCRS guidance takes effect April 1, 2013. However, plan sponsors may rely on the guidance prior to that date and submit compliance applications accordingly.