The IRS recently issued Revenue Procedure 2016-51 (the 2016 RP) to provide revised procedures for its Employee Plans Compliance Resolution System (EPCRS) – the system through which plan sponsors can correct errors in the form and operation of certain retirement plans intended to satisfy the requirements of Sections 401(a), 403(a), 403(b), 408(k) or 408(p) of the Internal Revenue Code (Code). Unless properly corrected, such errors may result in the loss of a retirement plan’s favored tax status under the Code.
The 2016 RP continues a trend of supplementing existing EPCRS relief and streamlining its corrections procedures. The 2016 RP modifies and supersedes the consolidated statement of EPCRS that was issued in 2013, Revenue Procedure 2013-12 (the 2013 RP), by taking into account certain recent changes in the IRS’s determination letter application program as well as incorporating prior revenue procedure guidance.
The 2016 RP is effective Jan. 1, 2017. Below are an overview of EPCRS and highlights of significant changes made by the 2016 RP.
EPCRS Programs
Three programs comprise EPCRS:
- Self-Correction Program (SCP)
- SCP is a means of correcting a retirement plan’s operational failures without involving the IRS. To use SCP, an employer must correct the failure in a prescribed manner 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 in which the failure occurred.
- Voluntary Correction Program (VCP)
- VCP requires filing an application and paying a fee to seek IRS approval of the correction. 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 Closing Agreement Program (Audit CAP)
- Unlike SCP and VCP, Audit CAP is initiated by the IRS and 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 applies, EPCRS generally requires full correction of the failure, which means the impacted participants and the plan must be made whole.
Highlights of Significant Changes
Following are some of the significant changes the 2016 RP made to EPCRS:
- Determination Letters
- Several sections of the 2013 RP refer to filing for a favorable determination letter for a qualified retirement plan or were contingent upon having such a letter. For example, under the 2013 RP the ability to use SCP to correct an error through EPCRS was contingent upon the qualified plan having a current favorable determination letter. The 2016 RP eliminates that requirement. Further, due to the upcoming changes in the determination letter program, the 2016 RP provides that qualified plan sponsors will no longer be required, nor permitted, to submit a determination letter application when correcting qualification errors through EPCRS when such correction includes a plan amendment. For more information on the recent changes to the IRS’s determination letter program, see our WorkCite of July 20, 2016.
- Incorporation of Prior Modifications
- The 2013 RP was modified by Revenue Procedures 2015-27 (relating to the correction of overpayments and certain other topics) and 2015-28 (relating to the correction of failures with respect to automatic contribution features and encouraging the early correction of employee elective deferral failures). The 2016 RP incorporates the changes made by these modifications. For more information on the 2015 revenue procedures, see our WorkCite of April 13, 2015.
- User Fees
- As mentioned above, VCP requires filing an application and paying a fee to seek IRS approval of the correction. Historically, “compliance” fees for VCP applications were set forth in a schedule contained in the current revenue procedure setting forth EPCRS. Effective for submissions made on or after Feb. 1, 2016, however, EPCRS was modified to provide that applicable fees, now called “user” fees, would instead be determined in the IRS’s annual revenue procedure addressing other employee plan fees. The 2016 RP incorporates these changes and provides that beginning in 2017, all user fees and rules relating to user fees for VCP submissions will be published in the annual employee plan revenue procedure setting forth user fees.
The 2016 RP states that the IRS and Treasury Department will continue to update EPCRS, in whole or in part, from time to time. In particular, the IRS continues to solicit comments on the correction procedures for recovering or recouping overpayments. We will continue to provide WorkCite updates on significant developments.
For further information, please contact one of the authors — Robert B. Wynne, Katie M. Rak and Allison P. Tanner — or any other member of McGuireWoods’ employee benefits team.