Since 1991, the IRS has had formal correction programs in place for various retirement plan compliance issues. Current programs under that Employee Plans Compliance Resolution System (“EPCRS”) consist of the following:
- Self-Correction Program (“SCP”): This program can be used to correct a wide array of compliance issues, without having to apply to the IRS for relief or to pay any fee to the IRS, if the plan sponsor or a plan service provider discovers the issues.
- Voluntary Correction Program (“VCP”): This can also be used to correct a wide array of compliance issues that are discovered by the plan sponsor or a plan service provider. However, this program applies when issues are “significant.” Several factors must be considered when determining whether issues are “significant,” such as the number of affected participants and the number of years that the issues occurred. Under the VCP, the plan sponsor must file an application with the IRS and pay an application fee (based on the plan’s asset total) in order to obtain IRS approval of the issues’ correction methods.
- Audit Closing Agreement Program (“Audit CAP”): This program applies when the IRS discovers compliance issues, typically during an audit of a retirement plan. Penalties under this program typically greatly exceed the application fee under the VCP.
On April 19, 2019, via Revenue Procedure 2019-19 (“2019-19”), the IRS published an updated version of the EPCRS. This 125-page, updated version contains several employer-friendly changes, including the following:
- Before 2019-19, plan sponsors could use the SCP to correct an “operational failure” (a failure to comply with a plan provision) by adopting a retroactively-effective plan amendment that conformed the plan’s terms to the plan’s prior operations. However, that only applied in very limited situations (e.g., when the operational failure consisted of making hardship distributions to employees, even though the plan document did not provide for hardship distributions). Fortunately, 2019-19 expands the number of situations when SCP can be used to correct operational failures via the adoption of a retroactive amendment. In fact, any operational failure can now be corrected via a retroactive amendment under the SCP if: (1) the plan amendment would result in an increase of a benefit, right, or feature; (2) the increase in the benefit, right, or feature is available to all eligible employees; and (3) providing the increase in the benefit, right, or feature is permitted under the Internal Revenue Code and satisfies the general correction principles of Section 6.02 of 2019-19.
- Before 2019-19, no participant loan issues could be corrected under the SCP. Now, the most common participant loan issue (defaulted loans) can be corrected under the SCP if the loan’s maximum statutory repayment period (five years, for most loans) has not expired. However, the Department of Labor (“DOL”) will not issue a no-action letter under its Voluntary Fiduciary Correction Program regarding a plan sponsor’s failure to withhold loan repayments from participants’ paychecks, unless a VCP application is filed regarding that loan issue. Therefore, plan sponsors and their advisors should evaluate whether a VCP filing would be prudent, depending on the degree of loans’ noncompliance. Also notable is the fact that under 2019-19, the SCP can now be used to correct the operational failure of allowing a participant to take more loans than the plan document allows.
- Plan document failures, which typically come in the form of failing to timely adopt legally-required amendments, can now be corrected under the SCP instead of filing a VCP application. Plan sponsors can retroactively adopt required amendment(s) if: (1) the plan has current favorable determination letter, opinion letter, or advisory letter; and (2) the retroactive amendment is adopted by end of the second plan year after the plan year in which the amendment should have been adopted.
2019-19 states that “It is expected that the Treasury Department and the IRS will continue to update the EPCRS revenue procedure, in whole or in part, from time to time, including further improvements to EPCRS based on comments received.” I will continue to update you when such updates occur.
Here is a link to 2019-19: https://www.irs.gov/pub/irs-drop/rp-19-19.pdf