On July 16, 2021, the Internal Revenue Service (“IRS”) published an updated version of its correction procedures for qualified retirement plans, Revenue Procedure 2021-30, the Employee Plans Compliance Resolution System (“EPCRS”).
The revisions to EPCRS include a number of changes that are intended to help simplify and provide additional flexibility for correcting certain retirement plan failures. Below is a summary of the major changes:
- Extended Self-Correction Period for Significant Operational Failures.The IRS lengthened the self-correction period for significant operational failures from the end of the second plan year after the plan year in which the failure occurred to the end of the third plan year after the plan year in which the failure occurred. This extended period benefits plan sponsors by providing additional time to self-correct significant operational failures. Significant failures that extend beyond this period would need to be corrected through a submission to the IRS under the voluntary correction program (“VCP”), to avoid the risk of disqualification. Operational failures that are determined to be insignificant, based on the relevant facts and circumstances, may still be self-corrected without regard to the correction period.
- Expanded Self-Correction by Retroactive Amendment.
Prior to this update, a retroactive plan amendment could be used to self-correct operational failures only if the amendment increased a benefit, right, or feature for all eligible participants (and if certain other requirements were met). The updated EPCRS removes the requirement that all participants in the plan benefit from the retroactive amendment, which provides greater opportunity to self-correct certain operational failures.
- Revised Overpayment Correction Options
Historically, EPCRS required a plan sponsor to attempt to recoup an overpayment, plus appropriate interest, from the participant in certain circumstances, and, if the participant did not fully repay, to make the plan whole by contributing any shortfall (referred to in this post as the “historical correction method”).Revenue Procedure 2021-30 retains this historical correction method, but adds and expands other correction options for overpayments, which provide greater flexibility for plan sponsors.
For both defined benefit and defined contribution plans, a plan sponsor can give the recipient of an overpayment a choice regarding how they would like to repay (i.e., a single lump sum, an installment agreement, or if future benefit payments are due, by reducing future benefit payments to recoup the overpayment). In addition, the de minimis overpayment amount, for which a plan sponsor is not required to seek repayment, is increased from $100 to $250.
For a defined benefit plan, there are two new options for overpayments (in addition to the historical correction method, as modified). First, under the “funding exception correction method,” if the defined benefit plan’s adjusted funding target attainment percentage (“AFTAP”) is 100% or more as of the date of the correction, the plan sponsor does not need to make corrective contributions or seek repayment from the participant. However, if the participant is receiving ongoing payments, future benefit payments must be reduced to cover the cost of the overpayment. Second, for the historical correction method, a plan sponsor can use a “contribution credit” correction method to reduce the “make whole” contribution based on certain actuarial calculations, taking into account the minimum funding requirements (and assuming specified funding requirements are met). If the amount is not reduced to zero, then the plan sponsor or another party would still be required to make the plan whole for the remainder.
Note that, regardless which method is used, the participant must be notified that the amount is not eligible for favorable tax treatment (i.e., that the overpayment was not eligible for rollover to another qualified retirement plan or IRA).
- Changes to Anonymous VCP Submission Options
Prior to this update, and through December 31, 2021, a plan sponsor can submit an anonymous VCP submission to request approval of a proposed correction method. The anonymous VCP process is often used when there is uncertainty about whether the IRS will approve a given correction option.I If the plan sponsor is unable to obtain agreement from the IRS, the application may be withdrawn while retaining anonymity.Effective January 1, 2022, the IRS eliminated the anonymous VCP process. In its place, the IRS will have an anonymous VCP pre-submission conference option. A conference may be requested only with respect to a correction method that is not a safe harbor correction method under EPCRS, and certain other requirements must be met. The conferences will be held at the discretion of the IRS, as time permits. At the conference, the IRS will provide oral feedback, which is advisory only and is not binding. After the conference, the IRS will provide written confirmation that the conference occurred, and the matter will be closed. If, after the conference, the plan sponsor decides to submit a VCP, it must follow the general procedures, including the submission of the user fee.
- Revised Sunset for Safe Harbor for Automatic Enrollment Corrections
EPCRS, prior to the most recent update, included a safe harbor correction method for failure to implement an automatic contribution arrangement (including an affirmative election made by a participant in a plan that included an automatic contribution arrangement), which provides relief from having to make corrective contributions for missed participant deferrals in some cases and allows for partial corrective contributions in other cases. This safe harbor was scheduled to sunset on December 31, 2020. Revenue Procedure 2021-30 extends the sunset by three years, to December 31, 2023.
The revised EPCRS includes a number of other changes. Your Faegre Drinker attorney can assist in navigating the EPCRS correction options and process if retirement plan failures are identified.