The Internal Revenue Service encourages employers and other retirement plan sponsors to voluntarily and timely correct plan failures to help ensure the plans’ ongoing tax-qualified status (and tax-favored treatment). However, in some cases, the IRS’ Employee Plans Compliance Resolution System (“EPCRS” – most recently restated in Revenue Procedure 2013-12) correction method for minor errors results in substantial costs to employers relative to the errors being fixed and a windfall to affected participants.

As discussed below, the IRS provides employers with new (and less costly) options for correcting certain elective deferral failures in Revenue Procedure 2015-28. In addition, in Revenue Procedure 2015-27, the IRS modifies and clarifies certain guidance for correcting retirement plan qualification failures. Instead of entirely replacing the current EPCRS program, this new revenue procedure clarifies overpayment recoupment rules, modifies the self-correction rules regarding certain annual addition failures, and lowers the fees for certain voluntary correction submissions, among other things.

Failure Related to Automatic Contribution Features.  When an employer fails to implement an automatic deferral (including elective deferrals made in lieu of automatic deferrals which were not implemented properly) under the EPCRS, the employer generally is required to make a qualified nonelective contribution to make up for the missed deferral opportunity by contributing 50% of the missed deferral amount. The employer is also required to make up any missed matching contributions and missed earnings. In RP 2015-28, the IRS appears to acknowledge the inequity of this provision and provides an alternative correction method which eliminates the requirement for employers to make this 50% of the missed deferral contribution as long as certain correction timing and notice requirements are satisfied. RP 2015-28 also allows the employer to use the plan’s default investment alternative’s performance to determine lost earnings on missed matching contributions, if any, significantly simplifying this calculation.

Brief Failures. The modification to the EPCRS also allows employers to correct brief (up to 3 months) elective deferral failures without making a contribution for the lost deferral opportunity, subject to correction timing and notice requirements. Similarly, the modification to the EPCRS provides for a reduced employer contribution (25% of the affected employee’s missed deferral) if the elective deferral failure is not “brief”, but is timely corrected within a limited period in accordance with the EPCRS and the notice requirements are met.

 Plan Overpayment Failures. When a plan participant receives a greater benefit than the benefit to which he or she is entitled under the plan terms, the overpayment may be corrected by having the participant repay the plan or by reducing future benefit payments to the participant. Large overpayment recoupments have resulted in financial hardships – particularly in cases where periodic pension overpayments continued for many years. RP 2015-27 clarifies the existing rules for overpayments paid to plan participants by stating that plan sponsors have some flexibility to correct overpayments and that plans aren’t required to recoup overpayments in every situation. Depending on the facts and circumstances, it may be appropriate for the employer itself (or another party, if at fault) to restore the overpayment amount to the plan or to retroactively amend the plan to conform with the overpayment (which still would require submission to the IRS under the Voluntary Correction Program). The IRS seeks public comments on the circumstances in which employers should be required to restore the overpayment amount.

Excess Annual Addition Failures. The annual addition (the amount that may be contributed by the employer and employee to an employee’s 401(k) or 403(b) plan account) is limited by Internal Revenue Code section 415(c). RP 2015-27 modifies RP 2013-12 to permit plan sponsors to use the Self Correction Program to correct excess annual additions – even recurring excess annual additions – if the plan only has elective deferrals and nonelective contributions (but not plans that have matching contributions). The timeframe for distributing excess annual additions is increased to 9 ½ months (instead of 2 ½ months).

Fees For Correcting Minimum Distribution and Loan Failures. Generally, the Voluntary Correction Program fee is based on the number of participants such that, depending on the number of participants, an employer would have to pay a VCP fee of anywhere from $750 (plans with no more than 20 participants) to $25,000 (plans with over 10,000 participants). RP 2015-27 lowers the VCP fee where the sole failure being corrected under VCP is late payment of required minimum distributions and affects no more than 300 plan participants.   If the employer meets the conditions for the reduced VCP fees, the fee would be $1,500 for minimum distribution failures involving 151 to 300 participants and only $500 for minimum distribution failures involving no more than 150 participants.

If the only failure involves loan failures that affect no more than 25% of participants, the general VCP fee – based on the number of participants as set forth in RP 2013-12 – is reduced by 50%. RP 2015-27 sets the VCP fee at $3,000 where over 150 loan failures are being corrected and at $300 where no more than 13 loan failures are being corrected.   (Self correction, without a VCP filing, still is not available for loan failures.)


While RP 2015-27 and RP 2015-28 make the IRS’ correction program easier to use and less costly in certain ways, additional flexibility and fee relief would be welcome for employers seeking to ensure continuation of employee retirement benefit programs.