The IRS has revised its Employee Plans Compliance Resolution System (the “EPCRS”), under which errors in the administration of qualified retirement plans may be corrected. Below, I reproduce a memo I prepared summarizing the EPCRS as revised. If any errors arise in plan administration, consideration should be given to fixing them using the EPCRS. Let me know if you have any questions.
IRS REVISES EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM (EPCRS) IN A NEW REVENUE PROCEDURE
The Internal Revenue Service (the “IRS”) has issued Revenue Procedure 2016-51 (the “Revenue Procedure”), which revises and updates the Employee Plans Compliance Resolution System (the “EPCRS”). The EPCRS is a comprehensive system which can be used by Plan Sponsors of qualified retirement plans (such as the Trustees of a multiemployer pension plan) to correct errors that have arisen in the maintenance or operation of the plans. The Revenue Procedure is effective January 1, 2017.
The components of EPCRS are the Self-Correction Program (the “SCP”), the Voluntary Correction Program (the “VCP”), and the Audit Closing Agreement Program (“Audit CAP”). If the Plan Sponsor corrects a failure in accordance with the applicable requirements of the SCP, the VCP or the Audit CAP, the plan may continue its “qualified” status under the Internal Revenue Code (the “Code”).
The SCP is available only to correct an operational failure, which is the failure to follow the terms of the plan in a manner which would adversely affect the plan’s “qualified” status under the Code. A Plan Sponsor may use SCP to correct an operational failure by a plan amendment in order to conform the terms of the plan to the plan’s prior operations, but only in very limited circumstances. SCP is not available to correct operational failures that are egregious or that relate to the diversion or misuse of plan assets.
Plans are eligible for SCP with respect to significant and insignificant operational failures. Whether a failure is significant or insignificant depends on how many participants, and how much of the plan assets, are affected by the failure. However, in the case of a significant operational failure: (1) as of the date of correction, the plan must be covered by an IRS determination letter, and (2) the correction must be completed (or significantly completed) by the last day of the second plan year following the plan year in which the failure occurred, or if earlier, on the date on which an IRS audit of the plan begins. Insignificant operational failures may be corrected under SCP at any time, and even if the plan is under IRS audit.
To use the SCP, when available, the Plan Sponsor must correct the failure in a manner which complies with the Revenue Procedure, and make, and keep records of, the correction. There is no fee to pay to the IRS, and IRS approval of the correction method is not required.
A Plan Sponsor, at any time before IRS audit, may use the VCP to file an application with the IRS, pay a limited fee and receive the IRS’s approval for correction of certain plan failures. The VCP is available to correct all plan failures (even those which are egregious for a higher fee), other than those which relate to the diversion or misuse of plan assets.
The user fee is determined under a schedule set out in section 6.08 of Revenue Procedure 2016-8. Currently, the user fee is:
— $15,000 if the plan has more than 10,000 participants;
— $10,000 if the plan has 1,001 to 10,000 participants; or
— a lower fee for plans with fewer participants.
The IRS issues a Compliance Statement detailing the failures identified by the Plan Sponsor in the application, and approving the correction methods which the Plan Sponsor will undertake. The Plan Sponsor then corrects the identified failures within 150 days after the issuance of the Compliance Statement, completing the VCP process.
If a failure (other than a failure corrected through SCP or VCP) is identified on IRS audit, the Plan Sponsor may correct the failure and pay a sanction to the IRS. The sanction imposed will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit.
EXAMPLES OF FAILURES THAT MAY BE CORRECTED
Plan Sponsors should use SCP or VCP to correct the following failures:
–Failure to pay minimum required distributions under section 401(a)(9) of the Code.
–Failure to offer or administer plan loans in accordance with the terms of the plan or the requirements of section 72(p) of the Code.
–Failure to amend the plan to reflect changes in the law by the time required by the IRS.