The IRS recently issued Revenue Procedure 2019-19 (the “2019 Revenue Procedure”), which restates and expands the Employee Plans Compliance Resolution System (“EPCRS”). EPCRS offers plan sponsors three plan correction methods: the Self Correction Program, permitting plan sponsors to correct failures under certain conditions without having to submit the correction to the IRS for approval and paying any fee; the Voluntary Correction Program (“VCP”), under which the failure and proposed correction may or must be submitted to the IRS for approval with the imposition of the applicable fee; and the Audit Closing Agreement Program (“Audit Cap”), which applies if an error is discovered upon IRS audit. The good news for practitioners and plan sponsors is that the 2019 Revenue Procedure has expanded the list of items that can be self-corrected.
Plan Document Failures
EPCRS permits plan sponsors to self-correct plan document failures if certain conditions are met. A plan document failure occurs if a plan document does not include a provision required by law. Prior to the 2019 Revenue Procedure, a plan document failure could be resolved only if the plan sponsor adopted the retroactive amendment, restored benefits to the extent required by the amendment and submitted the retroactive amendment to the IRS for approval under the VCP Program. Under the 2019 Revenue Procedure, the plan document failure may be corrected if the plan sponsor adopts the retroactive amendment, restores benefits to the extent required by the amendment and adopts the amendment within the self-correction period. According to the IRS, filing is no longer necessary if the amendment is adopted within the self-correction period.
The self-correction period is generally the end of the second plan year after the plan year in which the failure occurred. However, under the 2019 Revenue Procedure, a special self-correction period is established for a failure that applies to transferred or assumed assets as a result of a corporate acquisition or similar transaction. In such case, the self-correction period can be extended to the last day of the first plan year beginning after the acquisition or similar transaction.
The 2019 Revenue Procedure also expands the self-correction program with regard to the correction of an operational failure through a retroactive plan amendment. An operational failure is a failure on the part of the plan sponsor or plan administrator to follow the terms of the plan document. Generally, the correction of an operational failure is for the plan sponsor to provide the benefit that would have been provided if the terms of the plan had been followed. However, prior to the 2019 Revenue Procedure, plan sponsors were permitted to correct enumerated operational failures through amending the plan. The permitted retroactive amendment included an amendment in order to: (i) permit a qualified nonelective contribution (“QNEC”) if the QNEC is necessary to the correction; (ii) adjust the contribution formula regarding contributions over the compensation limit; (iii) allow for hardship distributions or loans when such distributions or loans were made, even though not permitted by the plan; and (iv) expand eligibility to include individuals who were mistakenly permitted to participate in the plan. If the retroactive amendment could not be made for any of the above reasons, it could only be made with IRS approval under the VCP Program.
The 2019 Revenue Procedure, in addition to the above, permits the retroactive amendment of a plan pursuant to the self-correction program provided the retroactive amendment increases a benefit right or feature, the increased benefit right or feature is universal (applicable to all participants) and the increase is otherwise permitted by law.
Plan Loan Failures
Prior to the issuance of the 2019 Revenue Procedure, the IRS did not specify any specific self-correction measures for participant loan failures. This meant that a participant loan failure had to be corrected through a VCP filing unless the plan sponsor was willing to self-correct and run the risk that the IRS would not agree with the method of correction. EPCRS did enumerate several methods of correction for loan failures such as loans exceeding the maximum permissible amount, the correction of loans in default and loan terms that are impermissible under the law.
The 2019 Revenue Procedure specifically permits self-correction of loan failures if the plan sponsor failed to transmit the loan repayments taken from payroll or otherwise received by the plan sponsor to the plan on a timely basis, loans that do not comply with the plan limits on loan amount, duration or amortization requirements and loans that default because the plan sponsor fails to deduct loan payments from the participants’ wages. In addition, for loans that require spousal consent, and if the consent is not obtained, correction can be made by obtaining the required consent even though it is obtained after the loan is made. Also, if the loan does not comply with the terms of the plan, self-correction can be made through a retroactive amendment to the plan. Loan self-corrections must be made within the self-correction period.
For over 20 years, the IRS has offered EPCRS as the problem resolution guide for retirement plans. EPCRS has been a great success providing plan sponsors with a mechanism to correct plan defects. For the IRS, EPCRS has provided revenue through the VCP and Audit CAP that it likely would not otherwise have received. With each new EPCRS Revenue Procedure, the program expands, providing new avenues for plan compliance.