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:
Program (“SCP”): This program can be used to correct a wide
array of compliance issues that are discovered by the plan sponsor or a plan
service provider, without having to apply to the IRS for relief or to pay any
fee to the IRS.
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. This program always applies when
issues are “significant.” (SCP is available to correct “significant” issues
only under limited circumstances.) 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 VCP application fee.
16, 2021, via Revenue Procedure 2021-30 (“2021-30”), the IRS published an
updated version of the EPCRS. This 140-page updated version (which the IRS says
is a “limited update” of Revenue Procedure 2019-19) contains the following main
- Expanded guidance on the recoupment of overpayments: For defined contribution plans (e.g., 401(k)
plans and 403(b) plans), plan sponsors can now allow an overpayment’s recipient
to choose the method of repayment (i.e., lump sum payment, installment payments,
or an adjustment to future payments). Also, new methods are provided for
defined benefit plans to address overpayments, depending on the plan’s funded
- Anonymous submission procedure: The VCP’s anonymous submission procedure will
be eliminated as of January 1, 2022. Under that program, most retirement plans could
file a VCP application without initially identifying the plan or the plan sponsor.
If the IRS and the plan’s representative agreed on one or more correction
methods, the representative had 21 days from the agreement date to identify the
plan and the plan sponsor. If the plan sponsor chose to not identify itself, the
VCP application was closed (without the IRS learning the plan’s or plan
sponsor’s identity, but with the IRS retaining the VCP application fee).
- Anonymous, no-fee VCP pre-submission conference: Before submitting a VCP application, a plan
sponsor’s representative will be able to request an anonymous VCP
pre-submission conference with the IRS, to discuss potential corrective
actions. A VCP pre-submission conference will be available only: (1) with
respect to requested correction methods that are not described as safe harbor
correction methods under 2021-30; and (2) if the plan sponsor is eligible and
intends to submit an application under VCP. However, “VCP pre-submission
conferences are held only at the discretion of the IRS, and as time permits.” Also,
these conferences will only involve “oral feedback” from the IRS, and these
conferences will not be binding on the IRS. This new procedure will be
effective as of January 1, 2022.
- Correction period for significant failures: 2021-30 extends the SCP correction period for
“significant” operational failures and plan document failures from the last day
of the second plan year following the plan year for which the failure occurred
to the last day of the third plan year following the plan year for which the
failure occurred. On a positive note, this will likely reduce the number of VCP
applications that must be filed for plan sponsors (assuming they qualify for the
SCP). On a less positive note, rumor has it that the IRS will soon transfer many
of its employees from its VCP review team to its plan audit team.
- Corrective plan amendments: 2021-30 eliminates the IRS’s previous
requirement that retroactive plan amendments that are executed to correct certain
operational failures under the SCP had to benefit all participants
eligible to participate under the plan.
- Elective Deferral Failures: Previous IRS guidance provides an
employer-friendly, special correction method for certain elective deferral
failures involving employees who are subject to an automatic contribution
feature in a 401(k) plan or a 403(b) plan. Under that guidance, however, this
correction method was only available if the failure began on or before December
31, 2020. Fortunately, 2021-30 extends that date to December 31, 2023.
as noted above, 2021-30 became effective as of July 16, 2021.