The SECURE 2.0 Act of 2022 (the Act) contains several provisions that liberalize the rules for fixing particular retirement plan administrative mistakes that happen occasionally. The IRS has a comprehensive program for correcting retirement plan failures, the Employee Plans Compliance Resolution System (EPCRS), including a self-correction program and a voluntary compliance program (VCP). Most sponsors prefer to self-correct because the VCP filing can be time-consuming and costly, and sponsors must suffer the indignity of admitting their mistakes to the IRS. Three provisions in the Act provide employers with some relief for fixing retirement plan mistakes.
- Expansion of EPCRS – Eligible Inadvertent Failures. The Act significantly expands the types of retirement plan failures that can be self-corrected. Instead of identifying the types of failures that can be self-corrected, the Act provides that a retirement plan can self-correct for an “eligible inadvertent failure” (EIF) unless the IRS discovers the failure before the sponsor has demonstrated a specific commitment to self-correct it. In other words, once the self-correction has started, it can be self-corrected even if the IRS discovers the failure before the employer completes the correction. To take advantage of the new rule, the employer must correct the failure within a reasonable period. Under the current EPCRS, the IRS defines a reasonable period as the last day of the third plan year after the plan year in which the error occurs, but the Act extends the deadline indefinitely unless the IRS discovers the failure before the sponsor begins the self-correction process. The moral of the story is that if employers want to take advantage of the new liberal self-correction rules, they need to find the failure before the IRS does and start making the correction.
To qualify for self-correction under the new rule, an employer must also have established practices and procedures reasonably designed to promote and facilitate overall compliance in form and operation with the Internal Revenue Code’s requirements. In addition, self-correction is not available for egregious failures or failures involving diversion or misuse of plan assets or whose purpose is tax avoidance.
Self-correction is also available for several specific types of failures.
- Participant Loan Failures. The Act provides that EIFs related to participant loan failures can be self-corrected if the failure is corrected following existing EPCRS procedures for that type of failure. The failure will also be considered corrected under the DOL’s separate correction procedures, subject to any reporting or procedural requirements the DOL may decide to impose.
- IRA Failures. The Act expands self-correction to include failure where the employer is seeking a waiver of the excise tax associated with certain IRA failures and failures related to non-spouse beneficiaries’ distributions to inherited individual retirement plans as long as the beneficiary had reason to believe the funds could be rolled over without tax liability.
The Act requires the Treasury Secretary to issue guidance regarding the correction of EIFs, including corrections for specific failures and general correction principles for failures for which there is no specific correction. The Secretary must also revise EPCRS revenue procedure to reflect the above changes within two years.
- Retroactive Amendments Increasing Benefits. The Act also extends the deadline for amending plans to increase benefit accruals until the due date of the plan sponsor’s tax return (including extensions). Under prior law, amendments not required by law to retain the plan’s qualified status had to be made by the last day of the plan year. Under the new law, an employer could adopt an amendment that retroactively increases benefits to participants under the plan after the plan year is over but before the sponsor must file its tax return. For a calendar year corporation with a filing extension, the deadline would be September 15th of the subsequent year. This rule does not apply to matching contributions. This provision will be helpful only to a small group of plan sponsors who want to increase benefits retroactively after the plan year ends. This provision is effective for plan years beginning after December 31, 2023.
- Safe Harbor Corrections for Employee Elective Deferral Failures. The Act provides relief to plans with failures related to automatic enrollment or escalation features and plans that fail to offer an eligible participant an opportunity to make an affirmative deferral election because the plan improperly excluded them. Under prior law, employers with these types of plan failures did not have to make up for missed employee elective deferrals if they made the corrections within a specified time period. Still, that rule was set to expire on December 31, 2023. The Act makes the relief permanent.
To take advantage of the relief, a plan sponsor must correct the failure by the earlier of:
- The date of the first payment of compensation to the employee on or after the last day of the nine-and-a-half month-period after the end of the plan year during which the error occurred; or
- The first compensation payment date on or after the last day of the month following the month in which the employer receives notification of the error.
The employer still must make up any matching contributions associated with the missed deferrals (plus earnings) but may forego making up for missed elective contributions.
What Plan Sponsors Should Do. To take advantage of the new law, plan sponsors should:
- Identify and correct errors before the IRS discovers them – the race is on
- Establish practices and procedures designed to promote and facilitate compliance with IRS requirements
- Before filing a VCP application with the IRS, determine whether the failure qualifies for self-correction under the new law
- If employers want to increase benefits for the prior year based on better-than-expected financial results, they have until the due date of their tax return to do so
Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.