On December 31, 2012, the Internal Revenue Service (IRS) issued Revenue Procedure 2013-12 updating the Employee Plans Compliance Resolution System (EPCRS), the comprehensive system of correction programs for sponsors of qualified retirement plans. The components of EPCRS continue to be the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP).
The new EPCRS program supersedes the 2008 version of the program and makes a variety of changes. Some of those key changes include:
- Revised VCP Submission Procedures. The new program requires that all VCP submissions be filed on the new IRS Forms 8950 and 8951. Note that these forms are still in draft form and should be available soon. A signed check must accompany Form 8951, and plan sponsors should be aware that the IRS may use the account information on the check to instruct the financial institution to make an electronic funds transfer from the account. In addition, the IRS revised the EPCRS Appendices, such that the streamlined application schedules from Appendix F of Revenue Procedure 2008-50 are now contained in Appendix C, and Appendix F has been removed.
- Access Expanded to 403(b) Plans. Plans subject to Section 403(b) of the Internal Revenue Code (Code) may now correct plan document and operational failures made in tax years beginning after January 1, 2009, in substantially the same manner as qualified plans. Plan sponsors that failed to timely adopt a written plan document are encouraged to use VCP this year to correct the failure, as there will be a 50 percent reduction in the filing fee if the VCP submission is filed on or before December 31, 2013 (but only so long as the written plan document failure is the only failure in the submission).
- Correction of Code Section 436 Failures. The new program sets forth new procedures for correcting certain violations of the defined benefit funding-based restrictions set forth under Code Section 436. In addition, if any type of corrective distribution to a participant or corrective amendment is made while the plan is subject to funding-based restrictions under Code Section 436, the new program provides that the plan sponsor may be required to make a corrective contribution to the plan.
- Correction of Matching Contribution Failure. In the event that an employer fails to make a required matching contribution, the new program provides that in some cases a plan sponsor may make a corrective matching contribution rather than a qualified non-elective contribution (QNEC). Such a corrective matching contribution, unlike a QNEC, would be subject to the plan’s vesting schedule.
- Correction of Overpayment Failures. The new program clarifies that a corrective contribution to a defined contribution plan (including a 403(b) plan) generally will not be necessary if the overpayment was related to a premature distribution of the participant’s vested benefit, provided that the plan sponsor makes a reasonable attempt to recover the overpayment (plus earnings) from the participant or beneficiary.
- Correction of Certain Safe Harbor Plan Failures. The new program sets forth procedures for correcting various failures under certain types of safe harbor plans, including the failure to provide a participant with the opportunity to make an affirmative deferral election and the failure to make the required nonelective contribution.
- Correction of Testing Failures. The new program clarifies that corrective QNECs made to correct an ADP, ACP or multiple use test failure must satisfy the definition of a QNEC in the Treasury Regulations. Under the current regulations, this means that forfeitures may not be used to fund QNECs.
- Correction of Code Section 415(c) Failures. The new program clarifies that SCP may be used by certain plans that experience recurring annual additions in excess of Code Section 415(c) limitations, provided that corrective action is taken within two and a half months of the end of the plan’s limitation year.
- Locating Lost Participants. Because the IRS letter forwarding program was terminated on August 31, 2012, the new program revises the actions a plan sponsor must take to locate lost participants and beneficiaries. The new program also provides a limited extension of the SCP and VCP correction periods for certain plan sponsors taking action to locate lost participants.
- Amendments to Pre-Approved Plans. If a plan sponsor unilaterally amends its prototype or volume submitter plan to correct a qualification failure, the new program clarifies that adopting such an amendment generally will not preclude the plan sponsor from relying upon the plan’s opinion or advisory letter, provided that certain conditions are met.
Certain open questions remain unanswered. The IRS continues to request comments on corrections for safe harbor notice failures, designated Roth contribution failures, and failures to implement automatic enrollment and automatic escalation in certain plan types.
Rev. Proc. 2013-12 is effective April 1, 2013. However, plan sponsors are permitted to apply the provisions of the revenue procedure on or after December 31, 2012.© 2013 McDermott Will & Emery