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IRS Expands Self Correction Program

The IRS has expanded the Self Correction Program (SCP) under the IRS Employee Plans Compliance Resolution System (EPCRS) in Rev. Proc 2019-19. Under the new rules, certain retirement plan corrections for operational and plan document failures that previously required an application and user fee be submitted to the IRS under the Voluntary Correction Program (VCP) may be fixed under the SCP without contacting the IRS or paying a fee. We have described the new SCPplan corrections under the Rev. Proc. below.

Eligibility for Self Correction Program

In order to be eligible for SCP, a Plan Sponsor must have established compliance practices and procedures (formal or informal) in place and must be routinely follow ing them and the failure being corrected must have occurred through an oversight or mistake in applying them. Generally, a “significant” failure may only be corrected through SCP if that failure is corrected by the last day of the second plan year follow ing the plan year in which the failure occurred (the "two year correction period"). How ever, a plan sponsor may correct a failure that is not significant through SCP at any time. Whether or not a failure is “significant” is dependent on the facts and circumstances surrounding the failure. These general eligibility rules remain unchanged.

Participant Loan Failures

The expanded program permits for correction of a number of plan loan operational failures through SCP that were previously only permitted through VCP, as follows:

  • If the maximum loan repayment period has not expired, a defaulted loan may be self-corrected by (i) having the participant make a single lump-sum payment of any missed payments and accrued interest or (ii) by re-amortizing the outstanding balance of the loan over the remaining period of the loan, not to exceed the maximum repayment period under Internal Revenue Code (IRC) Section 72(p), or by a combination of the above methods. If the plan's rate of return exceeds the interest rate on the loan, the employer w ill need to make a corrective contribution to the participant's account.

  • In the alternative, a defaulted loan may be self-corrected by reporting the loan as a deemed distribution on Form 1099-R in the year of correction instead of the year of failure.

  • Failure to obtain spousal consent for a participant loan may be self-corrected by obtaining the appropriate spousal consent currently. If the affected spouse does not agree to give consent or the consent cannot be obtained, the failure must be corrected under VCPor Audit CAP.

  • Failure to limit number of participant loans to the maximum in the plan's loan policy may be self-corrected by adopting a retroactive amendment to the plan to increase the maximum number of participant loans permitted to conform to the plan's operation. To be eligible for this self-correction, the additional loans must have been available to all participants or only to non-highly compensated employees.

Retroactive Amendments for Operational Failures

Prior to the expansion of the program, correction of operational failures through a retroactive amendment was generally limited to VCP. How ever, certain operational failures may now be self-corrected through a retroactive plan amendment conforming the plan document to the plan's operation. To be eligible for this self-correction, the follow ing conditions must be met:

  • The corrective amendment must result in increased benefits, rights, or features (BRFs);

  • The increase in BRFs must be uniform and must be provided to all participants in the plan; and

  • The increase in BRFs must be permitted under the Internal Revenue Code and must satisfy the general correction principles under EPCRS.

Retroactive Amendments for Plan Document Failures

Prior to the expansion of the program, correction of plan document failures through a retroactive amendment was generally limited to VCP. How ever, plan document failures under 401(a) and 403(b) retirement plans may now generally be self-corrected as long as the failure is corrected within the two year correction period. In determining the two year correction period, the failure is considered to have begun in the plan year that includes the end of the applicable remedial amendment period. Additionally, the plan must have a favorable determination, opinion or advisory letter from the IRS. This requirement to have a favorable letter, appears to preclude plan sponsors from self-correcting failures involving late restatements of pre-approved plans, because at the time of the correction the plan's opinion or advisory letter generally would no longer be valid. We expect the IRS to clarify this requirement. Finally, the follow ing plan document failures are not eligible for self-correction:

  • Failure to adopt an initial plan document;

  • Failure to timely adopt amendments to correct demographic failures; or

  • Late adoption of discretionary amendments.

Please Note: The specific methods of correction described above are only required under the SCP. Additional and broader methods of correction may be available under the VCP.

Final Considerations

Given the IRS's recent elimination of all reduced VCP user fees, this expansion of the SCP is a welcome change and may result in significant cost savings to plan sponsors faced with plan corrections.

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Al Ward Executive Compensation Hill Ward Henderson
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Al is Co-Chair of the firm's Executive Compensation & Employee Benefits practice. Al is recognized throughout the professional community for his depth of experience and knowledge in the employee benefits area. Prior to entering the practice of law, Al was an actuarial and employee benefits consultant for over eight years.

Al has focused for over four decades on executive compensation, employee benefits, trusts and taxation. He represents many clients including publicly traded and privately held, taxable or tax-...

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Kirsten is a Shareholder in the firm's Corporate & Tax Group and practice co-chair of the Executive Compensation & Employee Benefits Group. Kirsten’s practice involves employee benefit matters associated with the design and ongoing administration of executive deferred compensation plans, welfare benefit plans, Section 401(k) plans, profit sharing plans, and pension plans. Kirsten represents tax-exempt entities, for-profit, private, and publicly-traded companies.

Kirsten represents clients before the IRS, DOL, and the PBGC with respect to employee benefits matters.

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Away from the office, Kirsten enjoys travel, reading, and spending time with her husband and children.

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Melanie Hancock Brown Employee Benefits lawyer Hill Ward Henderson
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Melanie is a Shareholder in the firm’s Executive Compensation & Employee Benefits Group. She practices in the area of ERISA, employee benefits and executive compensation. Melanie counsels a diverse clientele of for-profit,  nonprofit and governmental entities of all sizes regarding their qualified and nonqualified employee benefit plans, including 401(k) and profit sharing plans, 457 and 403(b) plans, defined benefit plans, ESOPs and other stock based benefits, and health, welfare and other fringe benefit plans. She drafts qualified and nonqualified plans, and provides...

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Bret Hamlin employee benefit lawyer Hill Ward Henderson
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Bret is a Shareholder in the firm’s Executive Compensation & Employee Benefits Group. He practices primarily in the areas of employee benefits, deferred compensation and trusts. Prior to entering the private practice of law, he provided plan design and consulting, third-party administration and investment, as well as retirement plan education services for clients. 

Bret represents large, medium and small employers with respect to many employee benefit matters, including both single employer and multiple employer qualified retirement plans, deferred...

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Timothy P Zehnder employee lawyer Hill Ward Henderson
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Tim is an Associate in the firm’s Executive Compensation & Employee Benefits Group. His practice focuses primarily on advising client employers (private and public, tax-exempt and for-profit) on a wide variety of compensation and benefits matters, including plan design, administration and termination, compliance with applicable laws (including the Internal Revenue Code, ERISA, HIPAA, and the Affordable Care Act), and resolution of compliance issues with the Internal Revenue Service, Department of Labor and Pension Benefit Guaranty Corporation.  Tim has experience assisting...

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