IRS Swamped by EPCRS Applications: The Price of Popularity
The IRS Employee Plans Compliance Resolution System (EPCRS) has been a true success story for the Service and for plan sponsors. Under EPCRS, a plan sponsor may voluntarily correct a wide variety of errors made in the administration or drafting of a tax-qualified retirement plan, with a more limited range of errors correctable with respect to a 403(b) plan. In some cases, the plan sponsor can self-correct without the need for any filing with the IRS while in other cases full correction can only be achieved with the approval of the IRS. The EPCRS program, however, may be falling victim to its own popularity and those who use it may wish to adjust their tactics accordingly. Here is one example.
Under EPCRS one way to correct a plan loan failure (i.e., the making of a plan loan that fails to meet the requirements) is to reamortize the loan over the remaining repayment period so long as the total repayment period does not exceed five years beyond the original date of the loan. Because this is a common error, a plan sponsor may implement this correction by filing a streamlined application under EPCRS. Under this approach, the sponsor describes the proposed method of correction in the application and then implements the correction after receiving a favorable enforcement resolution from the IRS. See EPCRS, Rev. Proc. 2008-50, Appendix F and Schedule 5. This method of correction works very well for fixing a loan failure if the streamlined submission is processed swiftly. It does not work well if the processing of the submission is delayed, because the loan must be reamortized over the remaining loan period. That means each month an application remains in process will be one less month over which the loan can be amortized (which in turn means higher monthly payments for the participant).
Historically our streamlined applications for loan corrections have been processed very quickly, sometimes in a matter of weeks. But those days may be over. We know of one case in which it took more than six weeks for an application even to be entered into the IRS's processing system. (Upon inquiry, the applicant was simply told that the IRS was "swamped" with applications!) In light of this, depending on the circumstances, we often advise clients to implement the correction before they receive an enforcement resolution from the IRS. This approach is not without risk, because implementing the correction before receiving the blessing of the IRS could mean that adjustments may have to be made after the IRS reviews the application. But that risk may be worth taking, especially where the alternative is watching the clock run down on the period within which the loan must be reamortized.