The IRS did its part to make Friday, April 19th a really good Friday for those who sponsor qualified retirement plans. After not making many friends when it jacked up the user fees for the Voluntary Correction Program (VCP) a year or so ago, the IRS has responded to industry requests (that DWC representatives helped draft) by now allowing plan sponsors to self-correct a number of more common missteps without the need to submit anything to the IRS at all.
The Employee Plans Compliance Resolution System (EPCRS) is the IRS correction program that has existed in some form or fashion for nearly 30 years. Its objective is to provide plan sponsors with a path to voluntarily correct plan mistakes at a cost that is less than what it would be if the failure was caught on an audit. Plan sponsors can self-correct certain errors and keep documentation in their files, but other more serious types of infractions require a formal application seeking IRS approval.
With each new iteration of EPCRS, the IRS has expanded the types of errors that qualify for self-correction. They have continued that trend in a big way with Revenue Procedure 2019-19, published on April 19, 2019. That’s a lot of 19s. This expanded availability of the Self Correction Program (SCP) component centers around three main types of failures:
- Participant loan failures,
- Plan document failures, and
- Operational failures corrected by retroactive plan amendment.
Participant Loan Failures
Participant loans seem like they should be simple, but the reality is that there are a lot of moving parts in the rules which means a lot of ways to make mistakes. Even though loan failures are pretty common correction has always been quite onerous, requiring a lengthy application for IRS approval for what is often an extremely small dollar amount. Without going too far into the weeds, the reason is that there are aspects of the loan rules that fall under both IRS and Department of Labor authority. The DOL does not recognize self-correction, so in an effort to give double-duty to loan corrections, the IRS required even the simplest and smallest loan failures to be formally submitted for approval.
The IRS, at least, has reversed course on this for certain loan failures. EPCRS now permits the self-correction in the following situations:
- Scheduled loan payments are not made on time causing the loan to go into default;
- Participant’s spouse does not provide written consent to the loan (only required for certain plans); and
- The plan issues a loan in excess of what is allowed, e.g. participant takes a second loan when the plan only allows one at a time.
While this expansion provides welcome relief for the most common loan failures, there are several loan-related errors that still require formal IRS approval.
- Loans that exceed statutory maximum amount - generally 50% of a participant’s vested balance;
- Loans that exceed the statutory limit as to duration - five years unless for the purchase of a primary residence;
- Requests to have a deemed distributed loan taxed in the year of correction rather than the year of the failure; and
- Corrections that also qualify for DOL approval.
Yep, you read that last one correctly. Even though the IRS now accepts self-correction of certain loan failures, the DOL still does not. That means in order to get the blessing of both agencies, loan failures must still be formally submitted for approval. Industry organizations have repeatedly asked DOL to reconsider its policy against self-correction, but they have not yet relented.
Plan Document Failures
A plan document failure is when a plan document is either missing language that is required to be there or contains language that is not permitted. They typically arise when a plan sponsor does not timely amend or restate its plan document following a law change. Under prior iterations of EPCRS, plan document failures could only be corrected via VCP.
The new and improved EPCRS now allows these types of failures to be self-corrected if certain requirements are met:
- The plan document must have a favorable IRS letter covering the most recent mandatory restatement – currently the PPA restatement that was required between May 2014 – April 2016.
- The error in question is not a failure to timely adopt the plan’s initial document.
- The failure is corrected no later than end of the second plan year following the year in which the plan document failure occurred.
Retroactive Plan Amendments
The IRS has always been very particular about correction by retroactive plan amendment. When it has been permitted, it has required a formal request for approval under VCP for all but the most limited circumstances. This is perhaps the greatest area in which self-correction has been expanded. Going forward, self-correction by plan amendment is allowed as long as the amendment:
- Results in an increase of a plan benefit, right, or feature;
- That increase is available to all those eligible for the plan; and
- The change is otherwise permitted under the law and regulations.
In other words, as long as the corrective amendment retroactively provides an increase in benefits that is available to all participants and doesn’t violate any other legal restrictions, it is an acceptable form of self-correction.
These changes are a pretty big deal, as they greatly expand the availability of self-correction to cover many of the more common types of mistakes that even the most well-intentioned plan sponsors occasionally make. Making timely correction is still critical, but now it can be done with a lot less paperwork and at a much smaller price tag. Even better is that these changes are effective immediately.
Think you might have a plan error in need of attention? Not sure if or how these changes apply to you? Give us a call or an email. The DWC team works regularly with plan sponsors to help take care of missteps and get their plans back on track.
For more information about plan corrections, be sure to check out our Correction of the Quarter.