IRS Updates Qualified Plan Correction Procedures

Employee Benefits Blog
July 29, 2021

The IRS recently issued Revenue Procedure 2021-30, which updates the correction program under the Employee Plans Compliance Resolution System (EPCRS).  EPCRS permits plan sponsors to correct failures in the form and operation of retirement plans intended to satisfy the requirements of Sections 401(a), 403(a), 403(b), 408(k) or 408(p) of the Internal Revenue Code.  Failure to properly correct any errors may lead to the loss of the retirement plan’s tax-qualified status.

Highlights of Significant Changes

Revenue Procedure 2021-30 made the following changes to EPCRS:

  • Self-Correction Program (SCP) – Extension of correction period for significant failures. SCP allows plan sponsors to correct “insignificant” operational failures at any time, but “significant” failures are required to be self-corrected within a specified period.  Previously, self-correction of significant operational failures was required to be substantially completed by the last day of the second plan year following the plan year in which the failure occurred.  Revenue Procedure 2021-30 extends this deadline by one year, to the last day of the third plan year following the plan year of the failure.
  • Self-Correction Program (SCP) – Plan Amendments. Revenue Procedure 2021-30 expands the ability for plan sponsors to use SCP to correct an operational failure by retroactively amending the plan to conform the plan’s terms to the manner in which it was operated.  Under the revenue procedure, certain operational failures may be self-corrected by retroactive amendment if the amendment results in an increase in a benefit, right or feature.  The prior version of EPCRS required that such amendment apply to all participants in the plan.  This is a helpful change as operational failures often do not impact all participants.
  • Extension of Safe Harbor Correction Method for Elective Deferrals. EPCRS includes a safe harbor correction during which certain elective deferral failures in 401(k) and 403(b) plans with an automatic contribution feature may be corrected without requiring the plan sponsor to make a qualified nonelective contribution for the missed deferrals.  Under the prior EPCRS, this safe harbor was set to expire on December 30, 2020.  Revenue Procedure 2021-30 extends by three years, to December 31, 2023, this safe harbor correction method.
  • Recouping Overpayments. Revenue Procedure 2021-30 modifies the overpayment correction principles to allow participants to repay an overpayment from a defined benefit or defined contribution plan in installments, in addition to lump sums or an adjustment of future payments.  Furthermore, for defined benefit plans that meet certain funding or contribution requirements, plan sponsors are no longer required to reimburse the plan for overpayment amounts.  Additionally, no correction is necessary if the overpayment is $250 or less (the previous threshold was $100 or less).
  • Anonymous Voluntary Correction Program (VCP) Submissions. Revenue Procedure 2021-30 eliminates the anonymous VCP submission process, effective January 1, 2022.  Instead, plan sponsors may request an anonymous no-fee VCP pre-submission conference with the IRS to discuss the failure and proposed correction method.  The IRS will provide the plan sponsor with oral feedback about the failure and proposed correction method(s).  The pre-submission conferences will be held at the discretion of the IRS and any discussion of any substantive issues at the conference is advisory only and not binding on the IRS.   The IRS will provide written confirmation that the conference took place.

Impact on Plan Sponsors

Plan sponsors should continue to review their plans to determine whether there have been any mistakes in plan operation or documentation.  The revised EPCRS offers additional flexibility to correct plan failures under both SCP and VCP.

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