The SECURE 2.0 Act of 2022 (SECURE 2.0) made a number of changes in law intended to simplify the administration of retirement plans, including through the expansion of the Internal Revenue Service (IRS) Employee Plans Compliance Resolution System (EPCRS), which is currently set forth in Revenue Procedure 2021-30. EPCRS furthers the goal of ensuring that tax-qualified retirement plans operate in compliance with the Internal Revenue Code of 1986, as amended (the Code), by providing a mechanism for sponsors and administrators of those plans to correct certain documentary and operational errors that may arise in plan administration.
What the Expansion Means for IRA Providers
Prior to the passage of SECURE 2.0, EPCRS could not be used to correct inadvertent errors in the administration of individual retirement accounts and individual retirement annuities (collectively, IRAs). SECURE 2.0 notably expands EPCRS to allow IRA providers to address inadvertent failures with respect to IRAs.
This is welcome news for IRA providers that, until now, have had few options for correcting inadvertent administrative errors (e.g., seeking a voluntary closing agreement with the IRS, or putting the onus on the IRA owners to apply for a private letter ruling or seek other relief).
On May 25, 2023, the IRS released Notice 2023-43 to provide taxpayers with interim guidance in the form of Q&As that, while not intended to be comprehensive, address some open questions related to the expansion of EPCRS. Notably, Notice 2023-43 confirms that IRA providers may not correct eligible inadvertent failures under EPCRS before Revenue Procedure 2021-30 is updated.
What Are ‘Inadvertent Failures’?
SECURE 2.0 provides that eligible “inadvertent failures” are failures that occur despite the existence of practices and procedures that satisfy the standards set forth in Section 4.04 of the current EPCRS in IRS Revenue Procedure 2021-30 or similar standards in the case of IRAs.
To meet the EPCRS standards, IRA providers must have formal or informal practices and procedures in place that are reasonably designed to promote and facilitate overall compliance in form and operation with applicable Code requirements, and should also be able to demonstrate that they routinely follow the established practices and procedures.
An inadvertent failure may occur through an IRA provider’s oversight or mistake in applying the established practices and procedures, or where an established procedure, while reasonable, is not sufficient to prevent the occurrence of the failure.
However, SECURE 2.0 makes clear that failures that are egregious, relate to the diversion or misuse of plan assets, or are directly or indirectly related to an abusive tax avoidance transaction are not eligible inadvertent failures. Future guidance on the EPCRS expansion may provide additional details regarding standards applicable to IRA providers.
When to Expect IRS Guidance
The IRS must issue guidance on the expansion of EPCRS to cover IRAs and the correction methods that may be used to correct inadvertent failures by December 29, 2024, which is two years after the enactment of SECURE 2.0.
Wish List for IRA Providers
SECURE 2.0 expressly calls out errors related to (1) the waiver of the excise tax on failures to take a required minimum distribution and (2) rules permitting a nonspouse beneficiary to return distributions to an inherited IRA in certain cases involving a service provider’s inadvertent error.
Notably, the statute includes language indicating that other inadvertent errors in the administration of IRAs may also be corrected under the expanded EPCRS. Future IRS guidance will hopefully cover the following inadvertent errors that, despite reasonable practices and procedures, sometimes plague IRA providers:
- IRA contributions to incorrect customer accounts
- IRA contributions credited to the wrong tax year
- Failure to withhold proper taxes from IRA distributions
- Transfers and rollovers to incorrect customer accounts
- Failure to complete requested transactions by required deadline
- Failure to properly title IRA account or checks related to an IRA distribution
- Wrong IRA transaction processed; not following IRA owner instruction
- Errors involving allocating inherited IRA assets
As noted in Notice 2023-43, the Treasury Department and the IRS are asking the public to submit on or before August 23, 2023 written comments relating to common IRA failures, suggested correction methods for those failures, and the possibility of expanding EPCRS to be available for both IRA providers and IRA owners.
Stay tuned for further ML BeneBits posts, LawFlashes, and webinars as these developments emerge. To receive updates on the latest developments in employee benefits, including insights on the SECURE Act 2.0, subscribe to our mailing list.