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New IRS Retirement Plan Corrections For Overpayments And Other Errors

The Internal Revenue Service (“IRS”) recently released Revenue Procedure 2021-30 (the “Updated Procedure”), providing some new guidance regarding recoupment of overpaid benefit payments and other plan failures. The IRS Employee Plans Compliance Resolution System (“EPCRS”) allows retirement plan sponsors to correct plan failures, and the EPCRS, through the Updated Procedure, offers new correction methods. With the release of the Updated Procedure, the IRS is encouraging employers to voluntarily and promptly make corrections to benefit overpayments, without seeking participant repayment or additional employer contributions in some cases. In addition, other correction methods are expanded. These new procedures generally took effect on July 16, 2021, and the following is a list of the key takeaways for sponsors of retirement plans:

Recoupment and Repayment of Overpayments

For defined benefit plans, the IRS is enabling employers to avoid seeking recoupment of benefit overpayments made to employees under certain circumstances. An option is also available for employers to not correct overpayments by way of additional contributions. Recoupment from the participant or additional contributions by the plan sponsor is not required if the plan meets certain funding requirements. To this end, two methods were introduced in the Updated Procedure for defined benefit plans, including: (1) funding exception correction method, and (2) contribution credit correction method. The funding exception correction method allows certain single employer defined benefit plans to avoid corrective or recoupment payments if the plan’s adjusted funding target attainment percentage or “AFTAP” equals at least 100%. The contribution correction method allows overpayments to be reduced by the total increase of the plan’s minimum funding requirements due to the overpayment.

For defined contribution plans, plan sponsors are now able to provide overpayment recipients with three different options to repay: (1) in a single payment, (2) through an installment agreement, or (3) through future payment adjustments.

Self-Correction Period

The end of the self-correction period for significant failures is extended by one year. Previously, significant errors were allowed to be self-corrected without submitting the correction to the IRS only if the error was corrected within two plan years following the year of the error. Under the Updated Procedure, plan sponsors now have three years following the year of the error to self-correct significant errors. This change also serves to extend the timeline of the reduced safe harbor correction amounts for missed elective deferrals. Previously, elective deferrals that should have been taken from a participant's pay, but were not, could be corrected with the plan sponsor contributing a Qualified Non-Elective Contribution ("QNEC") equal to 25% of the amount that should have been contributed, rather than the standard 50% QNEC, if the error was corrected more than three months but within two plan years following the year of the error. The correction period for a reduced employer contribution for elective deferrals is now three years rather than two years following the year of the error.

Voluntary Correction With IRS Approval

The anonymous Voluntary Correction Program (“VCP”) previously in place is eliminated. There is now an anonymous, no-fee, VCP pre-submission conference procedure. This procedure permits plan sponsors and their representatives to anonymously request a pre-submission conference to discuss a potential VCP submission. Both the anonymous VCP elimination and the implementation of the new procedure will become effective on January 1, 2022.

Increasing De Minimis Amounts
The threshold for certain de minimis amounts for which a plan sponsor is not required to implement correction is increasing from $100 to $250. If an overpayment is $250 or less, the plan sponsor is not required to seek the return of the overpayment. If a mistaken excess allocation to a participant is $250 or less, the amount is not required to be forfeited or distributed.

Self-Correction by Plan Amendment

Previously, under certain circumstances, a plan sponsor could correct an operational error by adopting a retroactive amendment. However, this correction method could only be used if the amendment was favorable to all participants. The Updated Procedure removes the requirement that all participants must be more favorably treated than under the provisions of the existing plan provisions. A retroactive amendment is now available if it favorably impacts some, but not all, participants.

McGrath North is equipped with attorneys who have the extensive experience and expertise necessary to assist employers with plan corrections. This client alert only summarizes some of the key details of the Updated Procedure and is not intended to cover all the information included. Please contact one of our employee benefits attorneys for further information.