The Internal Revenue Service recently issued Revenue Procedure 2013-12 (RP 2013-12) to provide revised procedures for its Employee Plans Compliance Resolution System (EPCRS) for correcting errors in the form and operation of certain retirement plans. Unless properly corrected, such errors may result in the loss of a qualified retirement plan’s favored tax status under the Internal Revenue Code of 1986 (Code).
RP 2013-12 is the first major update to EPCRS in nearly five years. It continues a trend of supplementing existing EPCRS relief and streamlining its correction procedures.
RP 2013-12 is effective April 1, 2013. However, plan sponsors can choose to apply it now.
Below are an overview of EPCRS and highlights of significant changes made by RP 2013-12.
The three programs offered under EPCRS are the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP).
- SCP is a means of correcting operational failures without involving the IRS. To use SCP, an employer must correct the failure as specified in RP 2013-12 and then document the correction in a detailed memorandum. Failures that can be corrected by SCP are divided into “insignificant” failures, which can be corrected at any time, and “significant” failures, which must be corrected within a certain time period, generally by the last day of the second plan year following the plan year for which the failure occurred.
- VCP requires filing an application to seek IRS approval of the correction and the payment of a user fee. The advantage of VCP is that it can be used to correct a broader range of failures than SCP, including plan document problems and “significant” failures not corrected within SCP’s required time period.
- Audit CAP is an IRS-initiated program that applies to plans under examination. Audit CAP involves taking IRS-approved corrective actions, paying a negotiated penalty and entering a closing agreement with the IRS.
Regardless of which program an employer uses, EPCRS generally requires full correction of the failure, which means that the impacted participants and the plan must be made whole.
New VCP Submission Procedures
All VCP submissions under RP 2013-12 must include completed Forms 8950 and 8951. These forms request the same information as was required for VCP submissions under Revenue Procedure 2008-50, the predecessor to RP 2013-12. Also, all VCP submissions must be sent to the IRS in Covington, KY instead of the IRS’s Washington, DC office.
Section 403(b) Plan Corrections
Plan sponsors can correct failures in a Code Section 403(b) plan in the same manner as a qualified plan with the same failure. Also, under VCP and Audit CAP, a plan sponsor may correct a failure to adopt a written 403(b) plan in accordance with the 403(b) final regulations. For example, in the event a 403(b) plan was not properly executed, the failure may be corrected by a VCP submission.
Where, as part of the correction process, current and former plan participants and beneficiaries are due additional benefits, EPCRS requires that reasonable actions be taken to find these persons if they have not been located after a mailing to their last-known addresses. RP 2013-12 notes that the IRS letter-forwarding program is no longer available to search for participants and beneficiaries who are owed benefits from a retirement plan. Instead, reasonable actions must be taken by the plan sponsor to find the lost participant. The Social Security Administration’s letter-forwarding program can still be used for this purpose.
Section 457(b) Plans
The IRS has slightly expanded the ability for tax-exempt plan sponsors to correct Code Section 457(b) plan failures. RP 2013-12 provides that the IRS may consider a voluntary submission where, for example, the plan was erroneously established to benefit the entity’s non-highly compensated employees and the plan has been operated in a manner that is similar to a qualified plan.
Code Section 436 imposes certain restrictions on underfunded defined benefit plans. RP 2013-12 provides correction methods for benefit payments that violate this section. In certain situations, employers must contribute to the plan when benefit payments are made while the plan is subject to the Section 436 restrictions.
RP 2013-12 provides guidance on overpayments from defined benefit and defined contribution plans. In general, an employer must repay the plan for any overpayments that are not repaid by a participant. In some cases an employer will not have to repay the plan when a participant fails to make the repayment. For example, if an overpayment occurs as a result of an otherwise permissible benefit payment in the absence of a distributable event (e.g., an in-service distribution at age 59½ when the plan does not otherwise provide for such a distribution), the plan sponsor will not have to make the plan whole if the participant fails to do so.
RP 2013-12 defines the term “earnings” to generally reflect investment gains and losses. The new definition provides a uniform meaning to be used throughout RP 2013-12. However, as in the past, a corrective allocation in a defined contribution plan is not required to be adjusted for losses.
For more information on these matters, please contact either of the authors, Robert Cipolla and Robert Wynne, or any other members of McGuireWoods’ employee benefits team.