IRS Updates its Retirement Plans Correction Programs:

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 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.
  • 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. 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.

On July 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 changes:

  • 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 status.
  • 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.

Except as noted above, 2021-30 became effective as of July 16, 2021.