The IRS Adds Helpful New Features to Its Correction Program
Every few years, the IRS enhances its popular correction program for qualified retirement plans (the Employee Plans Compliance Resolution System, or EPCRS) to continue to encourage plan sponsors to correct any plan failures and bring their plans into compliance. Revenue Procedure 2021-30 reflects this latest enhancement of IRS correction guidance. Here is a summary of some of its helpful changes:
Anonymous Submissions. The IRS will replace its anonymous Voluntary Correction Program (VCP) submission process with a no-fee VCP pre-submission conference, effective January 1, 2022. Many practitioners already bypass the cumbersome anonymous VCP submission process by having informal discussions about a proposed correction with IRS VCP staff before deciding whether to use the VCP. The new revenue procedure entirely eliminates the anonymous VCP submission in favor of an anonymous no-fee pre-submission conference. The sponsor’s representative will receive verbal feedback from the IRS about the failure and proposed correction method. Although the new, less formal process is helpful, there are drawbacks — the pre-submission conferences are granted at the IRS’s discretion and the guidance is advisory and non-binding.
Self-correction — Extended Correction Period for Significant Failures. The Self-Correction Program (SCP) allows plan sponsors to correct significant operational failures without filing with the IRS, but only until the end of the second plan year following the plan year in which the failure occurred. After that, the sponsor would have to correct the failure under the VCP. The new revenue procedure extends the SCP deadline for significant operational failures until the end of the third plan year following the year in which the failure occurred. (Most insignificant failures can still be self-corrected at any time.) It also extends by three years (until December 31, 2023), the period during which certain “elective deferral failures” in plans with an automatic contribution features are correctable without requiring the employer to make contributions for “missed deferrals” on behalf of affected participants. This popular safe harbor provision for plans with automatic contributions was originally set to expire on December 31, 2020.
Plan Amendments Under SCP. The new revenue procedure also relaxes the rules about when a plan sponsor may use the SCP to correct certain failures by retroactive plan amendment. Under Rev. Proc. 2021-30, self-correction by retroactive plan amendment is available if the amendment increases a benefit, right, or feature in the plan, even if the amendment does not apply to all employees eligible to participate in the plan (as was previously required to use the SCP).
Recoupment of Pension Plan Overpayments. Certain operational failures cause overpayments to participants, and plan sponsors may find it difficult or unpleasant to recoup those payments. Under the new guidance, the IRS clarifies and expands the options for recoupment available to defined benefit plan sponsors.
Although plan sponsors may have wished for more, these changes to the IRS correction program are welcome and likely to be highly utilized.