On April 19, 2019, the Internal Revenue Service (IRS) released Revenue Procedure 2019-19, which updates its Employee Plans Compliance Resolution System (EPCRS). The new EPCRS significantly expands the use of retroactive plan amendments to self-correct errors and allows certain plan loan errors to be self-corrected. These changes relate to common plan errors, and together they should materially improve plan sponsors’ ability to maintain the tax-qualified status of their plans without requiring submissions to the IRS.
EPCRS allows retirement plan sponsors to correct certain documentary and operational errors that otherwise might jeopardize a plan’s tax-qualified status through one of three programs: the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) or the Audit Closing Agreement Program (Audit CAP).
Historically, the use of SCP has been limited, and for many errors plan sponsors have had to request formal IRS approval of their corrections through VCP or Audit CAP. The updated guidance expands SCP to include correction of certain:
- Plan document failures;
- Operational failures through the use of a retroactive plan amendment; and
- Plan loan failures.
These updates, effective as of April 19, 2019, are explained in detail below.
- Plan Document Failures. Under EPCRS, a plan document failure is a provision that, on its face, violates Internal Revenue Code requirements. For example, a plan amendment might inadvertently violate a tax qualification requirement. Previously, plan sponsors could correct plan document failures only through VCP or Audit CAP. Under the new guidance, SCP is available to correct most plan document failures, provided that the following conditions are met:
- The plan has received a favorable determination or opinion/advisory letter (403(b) plans can satisfy this requirement through alternative criteria);
- The failure is corrected by the end of the second plan year following the year in which the failure first occurred;
- The failure does not relate to an initial failure to adopt a qualified retirement plan or written 403(b) plan document in a timely manner; and
- The failure does not involve a demographic failure (related to coverage or nondiscrimination requirements) or an employer eligibility failure.
Eversheds Sutherland Observation: Although the new guidance allows plan sponsors to correct plan document failures without formal IRS approval, they have a limited time period in which to do so. This underscores the importance of periodically reviewing plan documents and catching errors quickly.
- Operational Failures. Operational failures sometimes occur because the plan administrator has been operating the plan consistently, but in a manner that differs from what the plan document describes. For example, a plan might offer hardship withdrawals despite failing to provide for them in the plan document. Previously, if plan sponsors wanted to correct operational errors by retroactively amending their plans to conform to their past practices, they had to submit the retroactive amendment for IRS approval under VCP, subject to certain limited exceptions. The new guidance broadens the availability of retroactive amendments without using VCP provided that the amendment:
- Results in an increase of a benefit, right or feature;
- Is available to all employees eligible to participate in the plan; and
- Otherwise satisfies general correction principles under EPCRS.
Eversheds Sutherland Observation: Because operational failures based on a misunderstanding of plan document provisions can sometimes continue for extended periods of time, and SCP is available for long-term errors only if those errors are “insignificant,” there may be additional pressure on the boundaries of that standard. Perhaps with that point in mind, the IRS indicates in the new EPCRS that it will issue additional examples of what constitutes an insignificant plan error on the IRS.gov website.
- Plan Loan Failures. Previously, plan loan failures could be corrected only through VCP or Audit Cap. The new guidance provides that the following loan issues can be corrected through SCP:
- The failure to repay a loan according to its terms;
- The failure to obtain required spousal consent (note, however, that spousal consent is not required for a loan under most 401(k) plans); and
- Allowing participants to take more loans than permitted under the plan.
Note, however, that the Department of Labor (DOL) will not issue a no-action letter under its Voluntary Fiduciary Correction Program (VFCP) with respect to certain loan defaults caused by an employer’s failure to withhold or transmit loan repayments, unless the plan sponsor goes through VCP. Plan sponsors should therefore consider whether to continue using VCP for these types of loan failures.
Additionally, the updated guidance provides reporting relief for certain defaulted loans that are not eligible for correction (or are not corrected). The plan sponsor must treat these loans as deemed distributions, and can report them on Form 1099-Rs for the current year rather than for the year of the failure. Previously, the plan sponsor had to specifically request under VCP or Audit Cap that the deemed distribution be reported on a Form 1099-R for the current year.
Eversheds Sutherland Observation: In the event a loan violates certain statutory requirements, such as the loan limits under Code Section 72(p)(2)(A), the loan must still be corrected under VCP or Audit CAP. However, the new guidance eases the administrative burden associated with correcting the most common types of loan failures.