The Internal Revenue Service (IRS) issued Revenue Procedure 2019-19 on April 19, 2019, updating the Employee Plans Compliance Resolution System (EPCRS) to expand the types of plan errors that can be corrected under EPCRS. EPCRS is available to correct plan document errors, plan operational errors, demographic errors and employer eligibility errors for qualified plans, 403(b) plans, SEPs and Simple IRAs. All of these errors put the plan at risk of tax disqualification. By utilizing EPCRS, a plan sponsor is able to put errors in the past and move forward from them knowing the qualified status of the plan remains intact.
There are three separate procedures within EPCRS:
- Self-correction (SCP) – Just as it sounds, errors under SCP are corrected in accordance with the principles and requirements set forth in EPCRS, without notification to or approval from the IRS. SCP is available to correct operational errors and limited plan document errors, but isn’t available to correct errors that are deemed to be egregious.
- Voluntary correction (VCP) – Correction under VCP is made by a voluntary application filed with the IRS disclosing the facts of the plan error and proposing a method of correcting the error. EPCRS sets forth many specific methods of correcting specific errors, but plan sponsors are often able to craft a unique correction method so long as it follows general principles outlined in EPCRS. There is a fee for using VCP, based on the size of plan assets. The larger the plan, the higher the fee. The current fee structure is $1,500 for assets up to $500,000, $3,000 for assets over $500,000 up to $10,000,000, and $3,500 for assets exceeding $10,000,000. VCP is available to correct all categories of correctable errors.
- Audit cap – Unlike SCP and VCP, audit cap is an involuntary process. A plan will generally be in audit cap when the IRS discovers an error when auditing the plan or the plan sponsor. In that event, the IRS will offer to not disqualify the plan provided that the plan sponsor pays a sanction, along with taking other prescribed corrective action.
What stands out in this latest update to EPCRS is the expansion of the types of plan errors that can be self-corrected under SCP – which is great news for plan sponsors. The following errors are among those that can now be corrected under SCP:
- Certain plan document failures. A plan document failure occurs when the written terms of the plan fail to satisfy applicable qualification requirements (whether by an omission of a required provision or the inclusion of an improper provision). SCP is not available, however, to correct the failure to timely adopt a written plan in the first place.
- Certain failures involving loans to participants. Three types of loan errors may be corrected in SCP: the failure to obtain spousal consent to the loan, where required; the failure to make loan payments in accordance with plan terms; and making loans in excess of a plan-imposed limit on the number of loans available to a participant. These are common errors in plan loan administration that previously had to be corrected in VCP. The ability to correct under SCP will be extremely beneficial.
- Correction by adopting a retroactive plan amendment (to conform the plan’s terms to the actual operation). Three conditions must be satisfied to use SCP in this manner: the amendment must increase a benefit, right or feature; the increase in the benefit right or feature must be available to all eligible employees; and the increase in the benefit right or feature is otherwise permitted under the Internal Revenue Code and meets the general principles of SCP.
Using EPCRS to correct plan errors requires compliance with the many components set forth in the Revenue Procedure. For example, one of the key prerequisites to using SCP is that practices and procedures must have been established for the administration of the plan and those practices and procedures must have been reasonably designed to promote and facilitate compliance with the applicable requirements of the Internal Revenue Code. The practices and procedures, whether formal or informal, must have been routinely followed and the error must have occurred by an oversight or mistake in applying them, or though reasonable they were insufficient to prevent the error.
In almost all cases, a plan sponsor should work with benefits counsel to ensure that all the t’s are crossed and the i’s are dotted when correcting plan errors under EPCRS.
More Recent Posts
Subscribe to our RSS Feed
Tax Law Insights
- Federal Tax (151)
- South Carolina Tax (103)