On July 15, 2021, the Internal Revenue Service (“IRS”) updated its Employee Plans Compliance Resolution System (“EPCRS”) by issuing Revenue Procedure 2021-30 (PDF). The EPCRS changes and revisions, which generally became effective on July 16, 2021, are beneficial to plan sponsors, participants and the retirement plan community.
The IRS has long provided a basic structure for the EPCRS and its underlying programs consisting of: (a) the Self Correction Program (“SCP”) – which allows plan sponsors to self-correct certain failures using pre-approved methods without making a submission to the IRS; (b) the Voluntary Compliance Program (“VCP”) – which requires a submission to the IRS; and (c) the Audit Closing Agreement Program (“Audit CAP”). When the IRS periodically publishes an update to EPCRS, such as Rev. Proc. 2021-30, the revisions are of interest to plan sponsors as they are mostly improvements and expansion of the programs to reflect changes in existing practices.
Noteworthy changes made by the IRS in Rev. Proc. 2021-30 include the following:
I. New Exceptions to Recoupment of Overpayments
The sponsor of a qualified plan that pays participants excess benefits to which they are not entitled (“overpayments”) is generally required to make the plan whole by either recovering the overpayments from participants or making corrective contributions to the plan. While EPCRS provides limited exceptions or exemptions to the requirement of recovering overpayments, the updated EPCRS introduces two new exceptions for defined benefit plans:
- Funding exception correction method. Under the funding exception correction method, if the plan’s certified or presumed adjusted funding target attainment percentage (“AFTAP”) determined under Code Section 436 at the date of correction is equal to at least 100% (or, in the case of a multiemployer plan, the plan is not in critical, critical and declining, or endangered status), no action is required to recover excess amounts that have already been paid to participants.
- Contribution credit correction method. Under the contribution correction method, the amount of overpayments may be reduced (but not below zero) by a “contribution credit.” The contribution credit equals: (A) the cumulative increase in the plan’s minimum funding requirements attributable to the overpayments beginning with (1) the plan year for which the overpayments are taken into account for funding purposes, through (2) the end of the plan year preceding the plan year for which the corrected benefit payment amount is taken into account for funding purposes; and (B) certain additional contributions in excess of minimum funding requirements paid to the plan after the first of the overpayments was made. If the amount of the overpayments is reduced to zero after the contribution credit is applied, no action is required to recover excess amounts already paid to participants. If, however, a net overpayment remains after the application of the contribution credit, the plan sponsor must take further action to reimburse the plan for the remainder of the overpayments.
II. Increased Small Overpayments and Excess Amount De Minimis Threshold
EPCRS does not require correction of small excess contributions or recovery of small overpayments. EPCRS raised the maximum amount of such small overpayments from $100 to $250.
III. Elimination of Anonymous VCP Submissions and the Creation of an Anonymous VCP Pre-Submission Conference
Effective January 1, 2022, instead of requiring a plan span sponsor that prefers to remain anonymous to make a submission regarding proposed corrections, the IRS made provisions for anonymous pre-submission conferences. This change allows plan sponsors to anonymously seek preliminary guidance on the issues underlying the proposed correction(s) without having to complete a full submission.
IV. SCP Correction Period for Significant Failures Extended by a Year
For failures where the plan is not operated in accordance with its terms (“operational failures”), the IRS identifies two classes of operational failures – “significant” and “insignificant.” Under EPCRS, sponsors can now use SCP to correct significant operational failures occurring in the three years (extended from two years) prior to the year in which the failure occurred, provided the other requirements of SCP are satisfied. Insignificant failures can still be self-corrected at any time.
V. Extension of Safe Harbor for Automatic Enrollment Failures
The IRS previously provided a safe harbor for correction of missed deferral failures for employees subject to automatic enrollment features in Section 401(k) or 403(b) plans. Under this safe harbor, which was set to sunset on December 31, 2020, no qualified non-elective contribution was required if certain requirements were met. EPCRS extends the sunset of the safe harbor correction method to December 31, 2023.
VI. Expansion of Ability under SCP to Correct Operational Errors by Retroactive Plan Amendment
One possible correction for an operational failure is to retroactively amend the plan so that its terms align with the way the plan was operated. Correction by plan amendment is a remedy available under VCP, and under SCP in limited circumstances. Prior to Rev. Proc. 2021-30, one of the requirements for retroactive correction by plan amendment under SCP was that the plan amendment had to result in an increased benefit, right, or feature, and that increase had to apply to all participants eligible to participate under the plan. EPCRS eliminates that requirement, thus expanding the ability to self-correct under SCP through retroactive plan amendments.
Additional changes may be forthcoming as the IRS also requested comments on Revenue Procedure 2021-30.
If you would like more information or have questions about these updates to EPCRS, please reach out to one of the authors or your Epstein Becker & Green, P.C. employee benefits lawyer.