The IRS doesn’t always have a reputation for being helpful, but in the world of retirement plans they have established an effective program to assist plan sponsors in correcting their own errors. The Employee Plans Compliance Resolution Systems (EPCRS) has been around for years and consists of three separate programs:
- The Self-Correction Program: defines certain errors that the plan sponsor is allowed to correct using pre-approved methods, and no communication with the IRS is necessary.
- The Voluntary Correction Program: defines certain errors the plan sponsor can self-correct but needs to file a form with the IRS requesting approval for the correction (and paying a filing fee).
- The Audit Closing Agreement Program: where the IRS has audited the plan or otherwise identified the problem, and the plan sponsor must correct and usually pay fines or penalties.
Of the three, Self-Correction is always the program I recommend plan sponsors use if they qualify. Recently, the IRS has expanded this program (as they do from time to time) to the benefit of those who qualify. The details are in Revenue Procedure 2019-19 and cover three main areas:
- Participant loan failures,
- Plan document failures, and
- Using retroactive amendments to correct failures.
Participant Loans
The following participant loan failures are now eligible for self-correction. These additions to the Self-Correction Program offer practical guidance and should be helpful when plans run into issues with participant loans.
Source: Millman Client Action Bulletin
Plan Document Failures
Plan document failures typically occur when the plan sponsor fails to adopt timely required amendments. The plan starts operating under new guidance but doesn’t amend the plan to be consistent with what they’re doing. Prior to the new Revenue Procedure, no plan document failures could be self-corrected, but now they can under the following circumstances:
- The plan is either a tax-qualified plan under IRC section 401(a) (including 401(k) plan) or a 403(b) plan;
- The plan has a “favorable letter” (either an IRS determination letter or, in the case of pre-approved plans, an IRS opinion or IRS advisory letter); and
- The correction is made with the two-year period specified in EPCRS (source: Milliman Client Action Bulletin).
This is a great expansion of the program and should be used if a plan sponsor finds they have a problem.
Correcting Operational Failures
Plan sponsors now have more opportunities to self-correct operational failures by retroactively adopting an amendment to conform the plan document with what they’re doing in practice. To do this, the following conditions must be met:
- The plan amendment would increase a benefit, right or feature.
- The increase in the benefit, right or feature would apply to all employees eligible to participate in the plan.
- Providing the increase in the benefit, right or feature to participants is permitted under the Internal Revenue Code (IRC) and satisfies all applicable EPCRS rules (source: Milliman Client Action Bulletin).
In summary, these expansions to the program should save plan sponsors some of the time and cost they often incur when trying to correct errors in a plan. In a world where regulators often play a game of “gotcha,” programs like the EPCRS are a welcome relief.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.