IRS Updates Self-Correction Program for Retirement Plans

[Editor's note: This article has been updated from a previous version.]

The IRS has made important changes to the Employee Plans Compliance Resolution System (EPCRS), which allows employers that sponsor 401(k)-style defined contribution plans or defined benefit pension plans to self-correct plan operational errors.

On July 16, the IRS issued new guidance, Revenue Procedure 2021-30, which supersedes the previous EPCRS guidance, Revenue Procedure 2019-19. "Given the complexity of the rules governing retirement plans, errors are common," said Lisa Tavares, a partner at law firm Venable in Washington, D.C. She called the EPCRS updates "welcome changes that will increase the ability to self-correct errors."

Under this latest EPCRS upgrade, "like musical chairs, some ground is gained while some is taken away," observed Christine P. Roberts, an employee benefits attorney with Mullen & Henzell in Santa Barbara, Calif.

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Key Changes

According to a summary of the 140-page regulation by the Ferenczy Benefits Law Center in Atlanta, major changes to EPCRS made by the new guidance include:

• Lengthening the time for self-correcting significant operational failures and document failures.
  

• Modifying the overpayment rules, particularly for defined benefit pension plans.
  

• Increasing the "de minimis" overpayment amount, for which no action needs to be taken, to $250 from $100. The plan can recoup overpayments through an installment agreement or a reduction of future benefits as opposed to just a lump sum repayment. In the case of a defined benefit plan, no recoupment of overpayments at all may be required, depending on the plan's funding level.
  

• Reinstituting the safe harbor correction methods for failure to automatically enroll participants in 401(k) features, permitting timely corrections to avoid any employer cost for the missed deferral opportunities if the problem is discovered and remediated within 9 1/2 months after the end of the affected plan year.
  

• Making it easier to correct an operational error by amending the plan to match the plan's actual administrative procedures.
  

Most of the changes took effect as of July 16, while some will take effect Jan. 1, 2022.

Significant EPCRS changes are highlighted below.

Anonymous Corrections Eliminated after 2021

The guidance eliminates an anonymous VCP procedure, whereby a submission could be made without revealing the identity of the plan and its sponsor pending agreement on the correction terms.

"The IRS opined at times that it was unhappy with a procedure that caused perhaps more work than a regular VCP but sometimes ended up with no proper correction," the Ferenczy attorneys noted. "In lieu of the fully anonymous procedure, the IRS will institute a free pre-submission anonymous conference process that is intended to give some assurances to employers and practitioners as to what is likely acceptable under VCP."

Following the presubmission conference, if the plan sponsor submits a VCP request, it can no longer be anonymous.

According to Randall Tracht and Claire Bouffard, attorneys in the Pittsburgh office of Morgan Lewis, "It is not yet entirely clear how well the anonymous VCP presubmission process may work—for example, will the IRS exercise its discretion not to schedule a conference for a requesting plan sponsor? Will the IRS provide useful oral feedback as part of the conferences?"

Because of these uncertainties, they noted, "plan sponsors that have been considering an anonymous VCP may wish to file soon, before the opportunity is no longer available."

Self-Correction Period Expanded

In the past, the correction window for using SCP ended on the last day of the second plan year following the plan year during which the plan failure occurred. "The EPCRS upgrade adds a whole additional year to the correction period," Roberts blogged. "Now, self-correction of significant failures may be made by the end of the third plan year following the plan year in which the failure occurred. Thus, a plan sponsor with a calendar plan year and a significant operational error occurring in 2018 will have until the end of 2021 to correct the error."

Retroactive Plan Amendments

Revenue Procedure 2021-30 also relaxes the rules about when a plan sponsor may use SCP to correct certain failures by retroactive plan amendment, explained Craig Day and Kellie Thomas, attorneys in the Seattle and Baltimore offices of law firm Jackson Lewis. Under the new guidance, "self-correction by retroactive plan amendment is available if the amendment increases a benefit, right or feature in the plan, even if the amendment does not apply to all employees eligible to participate in the plan (as was previously required to use the SCP)," they noted.

Pension Plan Overpayments

"Undoubtedly, the most significant changes to EPCRS relate to the correction of plan overpayments," wrote Sarah Touzalin and Christina Cerasale, attorneys in the Chicago office of Seyfarth Shaw. The IRS guidance "has been revised and reformatted to include helpful clarifications relating to the long-standing return of overpayment method" applicable to defined contribution and defined benefits plans.

Revenue Procedure 2021-30, they noted, provides that plan sponsors may give the recipient of an overpayment a choice of how they would like to repay.

According to actuarial consulting firm Cheiron, "The new correction principles are beneficial to plan sponsors because they reduce the need to seek repayment from participants or beneficiaries who received overpayments, and in some cases, do not require the plan sponsor, participants, or beneficiaries to reimburse the plan for overpayments to participants."

The new methods, however, may not be used if the overpayments are associated with a failure to satisfy statutory limits, are made to a disqualified person, or are made to an owner-employee, and in other specified cases.

Law firm Eversheds Sutherland posted a chart showing key changes from the prior version of EPCRS that are effective beginning July 16, 2021, except as otherwise noted.

Comments Requested

The IRS requested comments on its EPCRS changes by Oct. 14, 2021, and said further improvements to EPCRS could be made based on comments received. Comments may be submitted electronically via the federal eRulemaking portal at https://www.regulations.gov.