On July 16, 2021, the U.S. Internal Revenue Service (IRS) issued Revenue Procedure 2021-30, which modifies and supersedes prior IRS guidance regarding the correction programs under the IRS Employee Plans Compliance Resolution System (EPCRS). In general, the EPCRS provides tax-qualified plan sponsors the opportunity to correct plan failures through its Self-Correction Program, Voluntary Correction Program (VCP), and Audit Closing Agreement Program. The key changes to the EPCRS implemented by Revenue Procedure 2021-30 are described below.
Overpayment Correction Options
Pension plan sponsors previously had no alternatives other than to request that overpayment recipients repay any excess pension amounts received. Effective July 16, 2021, defined benefit plan sponsors have two additional correction methods available to fix operational failures resulting from overpayments:
1. Funding Exception Correction Method. Defined benefit plans subject to the funding limits in Internal Revenue Code Section 436 do not have to make corrective payments as long as the plan’s adjusted funding target attainment percentage is equal to at least 100% (or, in the case of a multiemployer plan, the plan’s most recent annual funding certification indicates that the plan is not in critical, critical and declining, or endangered status). Any future benefit payments to a participant or beneficiary who received an overpayment must still be reduced to the correct benefit payment amount.
2. Contribution Credit Correction Method. Overpayments required to be repaid to the plan are reduced by a “contribution credit” equal to (i) the amount by which the plan’s minimum funding requirement increased due to the overpayment and (ii) certain employer contributions in excess of the minimum funding requirements paid to the plan after the overpayment was made. If overpayments remain after the contribution credit is applied, the plan sponsor or another party must reimburse the plan for the remainder of the overpayment. If no overpayments remain after application of the contribution credit, no corrective payments to the plan are required.
Expansion of Self-Correction for Significant Operational Failures
Effective July 16, 2021, the self-correction period for significant operational and plan document failures has been expanded until the last day of the third plan year following the plan year for which the failure occurred. Previously, the self-correction period was only until the last day of the second plan year following the plan year for which the failure occurred.
Expansion of Self-Correction for Retroactive Plan Amendments
Previously, self-correction by plan amendment required any plan amendment that increased a benefit, right, or feature to apply to all participants eligible to participate under the plan. Effective July 16, 2021, an increase in a benefit, right, or feature resulting from a corrective plan amendment does not need to apply to all participants eligible to participate under the plan.
Elimination of Anonymous VCP Submissions, Addition of Anonymous Pre-Submission Conferences
Currently, plan sponsors may make anonymous submissions under the VCP in which the applicable plan, plan sponsor, or eligible organization is not initially identified. Effective January 1, 2022, the anonymous submission procedure will be eliminated, but the IRS will allow plan sponsors to make an anonymous written request for a no-cost pre-submission conference to discuss a potential VCP submission.
Extension of Safe Harbor Correction for Automatic Contribution Failures
The EPCRS previously implemented a safe harbor correction method for certain elective deferral failures related to automatic contribution features in an Internal Revenue Code Section 401(k) or 403(b) plan. If a failure to implement an automatic contribution feature or a failure to implement an affirmative election of an employee subject to an automatic contribution feature does not last beyond 9-1/2 months following the end of the plan year in which the failure occurred, no corrective contribution is required under the safe harbor if certain conditions are met. The safe harbor that was set to end on December 31, 2020, has been extended to failures that occur on or before December 31, 2023.
Increased Threshold for de Minimis Correction Amounts
Effective July 16, 2021, the threshold for certain de minimis amounts for which a plan sponsor is not required to implement a correction is increased from $100 to $250.