IRS Updates Its Correction Programs Guidance

Fortunately, the IRS realizes that it is almost impossible to have a retirement plan with no plan document issues or operational issues. Thus, for many years the IRS has maintained its Employee Plans Compliance Resolution System (“EPCRS”). The EPCRS provides three formal programs for correcting retirement plan compliance issues, as well as guidance on correcting a wide array of issues. On September 30, 2016, the IRS published its new version of the EPCRS, via Revenue Procedure 2016-51 (“2016-51”).

Unlike previous versions of the EPCRS, 2016-51 cannot be relied on until its effective date.  That date is January 1, 2017, when 2016-51 will supersede the current version of the EPCRS (Revenue Procedure 2013-12). However, given that January 1, 2017 will be here before we know it, I thought it would be helpful to provide a summary of changes that 2016-51 will implement. The most substantive changes are as follows:

• Determination Letter Applications: Numerous sections have been revised to account for the fact that the IRS has severely curtailed its determination letter program. (For example, effective January 1, 2017, the staggered 5-year remedial amendment cycles for individually designed plans will be eliminated. The scope of the determination letter program for individually designed plans will thus be limited to initial plan qualification, qualification upon plan termination, and certain other circumstances for which the IRS will publish guidance to address.)  Under previous versions of the EPCRS, in certain cases, plan sponsors submitting Voluntary Correction Program (“VCP”) applications to correct compliance issues via a plan amendment had to include a determination letter application. Under 2016-51, determination letter applications will no longer be required (or even permitted) in such cases.
• Audit CAP Sanctions: There will be a revised approach for determining Audit CAP sanctions. Previous versions of the EPCRS provided that the sanction equaled a negotiated percentage of the “Maximum Payment Amount,” which essentially equals the tax that the IRS could collect upon a plan’s disqualification. Under 2015-61, however, the Audit CAP sanction will be determined based on applicable “facts and circumstances.” 2016-51 sets forth several facts and circumstances in this regard (e.g., steps taken by the plan sponsor to ensure that the plan had no compliance issues).
• VCP Application Fees: Beginning in 2017, all user fees (and rules relating to user fees) for VCP submissions will be published in the annual revenue procedure that sets forth user fees for various IRS programs. Previous versions of the EPCRS provided VCP fees and rules relating to those fees.
• Revenue Procedure 2015-27 Changes: These changes have been incorporated into 2015-61. These changes include the extension of Self-Correction Program eligibility to repeated corrections of excess annual additions under Internal Revenue Code Section 415, deletion of the reference to the Social Security letter forwarding program (which is no longer available to locate missing retirement plan participants), and increased flexibility in the rules for correcting over payments to participants and/or beneficiaries.
• Anonymous VCP Submissions: 2016-51 provides that, if the VCP applicant and the IRS do not reach a resolution during the Anonymous VCP Submission process, then the IRS will no longer refund fifty percent of the applicable VCP application fee.
• VCP Forms: Unlike in previous versions of the EPCRS, the current versions of all VCP application forms are not included as an appendix in 2015-61. Rather, 2015-61 provides a link to the IRS webpage containing those forms.
• Revenue Procedure 2015-28 Changes: These changes, which have been incorporated into 2015-61, provide guidance on correcting “employee elective deferral failures.” Such failures consist of improperly excluding an employee from a plan and failing to implement an employee’s deferral election. (Specific guidance applies to plans that have an automatic enrollment feature.)

Here is a link to 2016-51: https://www.irs.gov/pub/irs-drop/rp-16-51.pdf