Long on the wish list of practitioners and plan sponsors alike, self-correction of certain common plan document issues and loan failures is finally an option under the Internal Revenue Service’s Employee Plans Compliance Resolution System (“EPCRS”), newly minted via Rev. Proc. 2019-19.
It is no secret that the IRS is continually dealing with reduced budgets and staffing. This, in part, has led to recent changes to EPCRS and its component program, the Voluntary Correction Program (“VCP”). The VCP involves submitting a filing to the IRS that discloses a qualified plan’s document and/or operational failure(s), and seeks approval of a plan sponsor’s proposed corrections. In early 2018, the IRS increased fees for certain VCP filings to align the costs of processing a VCP with the related user fee. More recently, the IRS has begun to require that all VCPs be submitted electronically. Now, the calls from practitioners to simplify the correction process and reduce the costs for plan sponsors by allowing self-correction (under ECPRS’s Self-Correction Program (“SCP”)) for certain common issues have been answered. Presumably, this is a win-win for all involved since it will also lessen the administrative burden for the IRS of reviewing and approving VCPs for some of the most comment and straightforward corrections.
The new and improved EPCRS, which became effective April 19, 2019, allows:
- Self-correction of certain plan document failures. Proc. 2019-19 allows the sponsor of a plan under IRC Section 401(a) (which would include a 401(k) plan) or Section 403(b) to self-correct certain failures to adopt a required plan amendment within the prescribed timeframe, if the plan has a favorable determination letter and such a correction is made within the self-correction period (i.e., by the end of the second plan year following the year of the failure). Self-correction continues to be unavailable for failing to timely adopt an initial plan document.
- Self-correction by retroactive plan amendment. Often plan sponsors would like to adopt a retroactive plan amendment to align the terms of a plan document with the plan’s prior operations. Under Rev. Proc. 2019-19, a sponsor may now do so without a VCP filing if three conditions are satisfied: (a) the plan amendment would cause an increase of a participants’ benefits, rights or features under the plan, (b) the increase in the benefits, rights or features is available to all eligible employees, and (c) the increase in the benefits, rights or features is permitted under the Internal Revenue Code and follows the general correction principals under EPCRS. SCP is not available to retroactively amend a plan if such amendment does not provide for a uniform increase in benefits, rights or features available to all employees eligible to participate in the plan. Instead, a plan sponsor, under those circumstances, will still need to do a VCP filing.
- Self-correction of certain loan failures. The following corrections for common loan failures are available if all conditions of Rev. Proc. 2019-19 are satisfied:
- A loan that does not satisfy the requirements of IRC Section 72(p), or that is in default, may be corrected via a deemed distribution in the year of correction, rather than the year of the failure;
- A defaulted loan may be corrected with a lump-sum catch-up payment, re-amortized payments over the remaining life of the loan, or a combination of the two (as long as the maximum period for repayment of the loan has not been exceed);
- A failure to obtain spousal consent for a loan (if required) can be obtained retroactively, as long as the spouse consents; and
- A plan may be retroactively amended to conform the plan’s terms to the plan’s operations when participants have been granted loans in excess of the number allowed under a plan’s existing terms.
- Self-correction of failures to obtain spousal consent. A failure to obtain spousal consent to a distribution option other than a qualified joint and survivor annuity may now be self-corrected via a retroactive consent, as long as the spouse will provide it.
We hope, and anticipate, these changes will lead to easier, and more cost-efficient, correction options for our clients, which in turn will cause increased compliance with the EPCRS correction principals. We are available to answer any questions about the ECPRS changes and to help navigate the guidance when plan document and operational failures are discovered.