The Internal Revenue Service (IRS) issued an important update late last month to the Employee Plans Compliance Resolution System (EPCRS) in Revenue Procedure 2019-19. The IRS provided a helpful summary of the changes. The most significant changes in the updated EPCRS, which took effect as of April 19, 2019, involved the expansion of the Self-Correction Program (SCP) to allow the correction of certain plan document and operational errors by plan amendment and to correct certain loan failures, obviating the need for plan sponsors to file Voluntary Correction Program (VCP) applications (and to pay the required user fees) for these failures.
Plan Document Failures
Under the updated EPCRS, plan sponsors are now permitted to correct certain failures to timely adopt required plan amendments under the SCP by retroactively adopting the required amendments. Prior to this update, correcting this type of failure required filing a VCP application and paying the required user fee. The SCP is only available for correcting this type of error if, as of the date of the correction, the plan is subject to a favorable determination letter (if the plan is individually designed) or opinion or advisory letter (if the plan is a prototype or volume submitter plan) from the IRS. In addition, the retroactive amendment must be adopted by the end of the second plan year after the plan year in which the error occurred. For example, under this rule, a required plan amendment that should have been adopted by December 31, 2019, for a calendar-year plan must, if corrected through the SCP, be adopted retroactively no later than December 31, 2021. This correction method is not available for a failure timely to adopt a discretionary amendment or one intended to correct a demographic failure.
This EPCRS update provides plan sponsors the ability to self-correct additional types of plan operational errors via SCP by retroactively adopting a plan amendment to conform the terms of the plan to its operations. This correction method is available under SCP if (1) the plan amendment would result in an increase of a benefit, right, or feature; (2) the increased benefit, right, or feature is available to all eligible employees; and (3) providing the increase in the benefit, right, or feature is otherwise permitted under the Internal Revenue Code and the general principles of EPCRS.
It is not immediately clear whether the term “benefit, right, or feature,” as used in this revenue procedure, refers to the narrow use of the term found in the US Department of the Treasury regulation pertaining to nondiscrimination testing (see Treas. Reg. § 1.401(a)(4)-4), or is a more general use of the term. However, we believe this term is intended to be used more broadly here, for example, to include corrections to the plan’s basic accrual or allocation formula. However, this type of self-correction is still limited by the requirement that the error be “insignificant,” which may be a challenging standard to meet for an error that goes back more than two plan years and affects all eligible employees. As always, we suggest consulting experienced legal counsel prior to pursuing a correction method for this (or any other type) of plan error.
In addition to these changes, the update also expands the ability of plan sponsors to self-correct certain types of plan loan failures, including errors related to loan defaults (failure to make loan payments under plan terms), deemed distribution reporting, failure to obtain spousal consent for a plan loan, and failures related to granting a number of plan loans exceeding the maximum number of loans permitted under a plan. The revenue procedure also contains several technical updates (e.g., reflecting the fact that all VCP applications must now be made electronically, and expanding the availability of self-correction to fix certain failures to obtain spousal consent).
If you would like more information or have questions about the updates to the EPCRS program, please contact the authors or your Morgan Lewis contacts.