Updates To IRS Correction Principles For Qualified Plans – Employment and HR

The IRS Employee Plans Compliance Resolution System (EPCRS)
permits any plan sponsor of a retirement plan (including SEP and
SIMPLE IRA plans) to correct plan failures. Three correction
programs exist:

1. Self-Correction Program (SCP) – authorizes corrections,
   consistent with recommended fixes for problems, without contacting
   the IRS or paying a fee;




2. Voluntary Correction Program (VCP) – authorizes corrections
   that are not eligible for SCP and involve obtaining the approval of
   the IRS that the failures were properly corrected; and




3. Audit CAP – the program for correcting failures discovered by
   the IRS or during an IRS audit that cannot be corrected using
   SCP.

Effective July 16, 2021, the IRS made significant changes that
are in most cases beneficial to plan sponsors, participants and the
retirement plan community. Those changes were published in IRS Revenue Procedure 2021-30. A plan sponsor may
now fix an operational failure in a defined benefit plan that might
exceed what is expressly permitted by the terms of the plan – for
example, the need to seek repayment from a participant or
beneficiary who received an overpayment is reduced and, in some
cases, correction does not require the plan sponsor to reimburse
the plan for an overpayment to a participant or beneficiary.

Previously, SCP would only be available in the case of
significant operational failures when detected within two years.
The correction period is now extended to three years. 

New opportunities to utilize a “retroactive plan
amendment” (to conform the plan document to recent plan
operation) now exist because the requirement that all participants
in the plan must benefit from the retroactive plan amendment is now
removed. The primary requirements are now only that the amendment
increases a benefit, right or feature for participants and that the
correction is consistent with published correction methods. In some
cases, a retroactive plan amendment that conforms the plan document
to the past operation may be an inexpensive fix.

Currently, there is the possibility of an anonymous VCP
submission. Beginning January 1, 2022, the new alternative
procedure is that a plan sponsor or representative may make an
anonymous written request for a pre-submission conference to
discuss a potential VCP submission without fee. After the
conference, the VCP submission, if made, can no longer be
anonymous.  

The definition of a “de minimis correction amount” is
increased from $100 to $250. This is important because a plan
sponsor is not required to implement a correction for a de minimis
correction amount.

Last, there had been a correction option, friendly to plan
sponsors, for a plan with automatic enrollment and contribution
features when the employer failed to implement the automatic
contribution features. If the problem was caught and corrected
before the due date of the IRS Form 5500 for the plan, or, if
earlier, shortly after being advised of the mistake by the
employee, then no employer contribution would be required; rather,
the correction would only require operating according to the terms
of the plan and implementing the deferral for future periods, in a
timely fashion. That correction option had previously only existed
for failures before December 31, 2020, and the correction option
had vanished in the sunset. This new release extends the correction
option to failures occurring before December 31, 2023.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.