The IRS recently issued Revenue Procedure 2021-30 (2021 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. Unless properly corrected, such errors may result in the loss of a retirement plan’s favored tax status under the code.
The 2021 RP made significant changes and revisions to EPCRS that should benefit plan sponsors, participants and the retirement plan community. The 2021 RP modifies and supersedes the most recent consolidated statement of EPCRS that was issued in 2019, Revenue Procedure 2019-19 (2019 RP).
The 2021 RP became effective July 16, 2021. Below is an overview of EPCRS, plus highlights of significant changes made by the 2021 RP.
Three programs comprise EPCRS.
- Self-Correction Program (SCP)
SCP is a means of correcting a retirement plan’s operational failures and certain plan document 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. Under the 2021 RP, this time period was extended to the last day of the third 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 certain additional plan document problems and “significant” failures not corrected within SCP’s required time period. All VCP submissions must be made electronically.
- Audit Closing Agreement Program (Audit CAP)
Unlike SCP and VCP, the IRS initiates Audit CAP, which 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 2021 RP made to EPCRS.
- New Overpayment Correction Options
When a plan participant or beneficiary receives a payment that exceeds the amount payable under the terms of the plan or exceeds a limitation provided in the Internal Revenue Code or regulations, known as an “overpayment,” plan sponsors must correct such operational failures using EPCRS’ prescribed methods. In response to repeated public requests for additional flexibility in correcting overpayments, the 2021 RP expanded correction principles applied to the recoupment of overpayments.
More specifically, the overpayment correction methodology in 2019 RP was modified to provide that overpayment recipients may repay such amounts through a single sum payment, an installment agreement or an adjustment of future payments. Additionally, 2021 RP added two overpayment correction methods for defined benefit plans. These methods reduce the need for defined benefit plans to seek recoupment of overpayments in certain instances and ease the process for participants’ repayment of such amounts, while still balancing the interests of the plan as a whole. Furthermore, in some cases, plan sponsors are no longer required to reimburse the plan for overpayment amounts (where recoupment was otherwise unsuccessful and/or other certain requirements are met).
- Extension of Correction Period for Significant Operational Failures
As noted above, the 2021 RP extended by one year the correction period for significant operational failures. Therefore, plan sponsors may use SCP to correct significant operational failures as long as the correction occurs by the last day of the third plan year following the year in which the failure occurred (e.g., for a failure that occurred during the 2021 plan year, by Dec. 31, 2024).
- Expansion of Self-Correction for Retroactive Plan Amendments
The 2021 RP made it easier for plan sponsors to correct operational failures through adoption of a retroactive amendment; it eliminated the requirement that all participants must benefit from a retroactive amendment adopted pursuant to SCP.
- Anonymous VCP Submissions and Presubmission Conferences
Effective Jan. 1, 2022, anonymous submissions under VCP are no longer permitted; however, on and after such date, plan sponsors (or their representatives) may make an anonymous written request to the IRS for a presubmission conference to discuss a potential VCP submission. Plan sponsors are not required to pay a fee to request a presubmission conference, though a presubmission conference may be requested only if the plan sponsor is eligible and intends to submit an application under VCP (i.e., a plan sponsor who requests a presubmission conference will generally be required to pay the applicable VCP user fee at the time of submission). Notably, IRS VCP presubmission conferences are held at the discretion of the IRS, as time permits.
- Extension of Safe Harbor Correction for Automatic Enrollment Failures
The 2021 RP extended by three years the sunset of the safe harbor correction method available for failures associated with missed elective deferrals of eligible employees subject to an automatic contribution feature in Section 401(k) or 403(b) plans. (The sunset was extended from Dec. 31, 2020, to Dec. 31, 2023.)
- Increased Threshold for Certain De Minimis Correction Amounts
EPCRS does not require plan sponsors to correct plan failures involving certain de minimis amounts. The 2021 RP increased this de minimis threshold from $100 to $250 with respect to certain operational failures (e.g., recovery of small overpayments, distribution of small excess amounts).
The 2021 RP stated that the IRS and Treasury Department will continue to update EPCRS. Future McGuireWoods WorkCite updates will continue to cover significant developments.