New EPCRS Guidance Expands Scope of 403(b) Plan Corrections
Nearly 20 years after the IRS first established a limited program for the correction of 403(b) plan administrative errors, 403(b) plans have finally been placed on equal footing with qualified plans with respect to the correction of operational, documentary, and demographic failures under the Employee Plans Compliance Resolution System (EPCRS). The expanded scope of 403(b) plan corrections made possible by Revenue Procedure 2013-12 comes as welcome news for tax-exempt and governmental employers and their advisors. The updated version of EPCRS officially takes effect April 1, 2013, but the guidance permits employers to rely on the 403(b) correction provisions beginning January 1, 2013.
A Bit of Historical Perspective
In 1992 the IRS launched an experimental program under which an employer who had received a favorable determination letter with respect to its tax-qualified retirement plan could voluntarily disclose to the IRS errors in the administration of the plan, make the required corrections, pay a fee, and thereby resolve the problem. The program, known as the Voluntary Compliance Resolution Program, proved quite popular from the start and continues to exist today as a component of EPCRS. Three years later, the IRS established its Tax Sheltered Annuity Voluntary Correction Program (TVC) to provide sponsors of 403(b) plans the opportunity resolve certain defects in the administration of such plans. The IRS consolidated its various correction programs (including the audit-based programs) to create EPCRS in 1998 and TVC was added to EPCRS the following year.
Nevertheless, even under EPCRS the range of 403(b) plan operational failures susceptible to correction was still limited and, importantly, there was no opportunity to correct documentary failures. One reason for that, presumably, was that the Internal Revenue Code contained no affirmative requirement that a 403(b) plan be administered under a written plan document. (Employers sponsoring 403(b) plans covered by ERISA adopted written plan documents, but non-ERISA 403(b) plans could get by on much less.) The final regulations under Code Section 403(b) imported an affirmative plan document requirement, and all 403(b) plan sponsors, regardless of the applicability of ERISA, had to adopt a written plan document no later than December 31, 2009.
Operational and Documentary Failures
As noted above, the prior iterations of EPCRS covered the correction of only certain types of errors in the administration of 403(b) plans and one important category of error was not clearly subject to correction – failure to follow the written terms of the plan document. Many of us have applied EPCRS correction principles for years to address problems in the administration of 403(b) plans, and that approach was unofficially blessed from time to time by IRS representatives in a variety of contexts. Now, under Revenue Procedure 2013-12, the correction methods available to address operational failures in 401(k) plans will officially be available for 403(b) plans. Errors unique to 403(b) plans, such as the failure to comply with the universal availability requirement, are also specifically addressed in the guidance.
Sponsors of 403(b) plans will also be able to correct defects in their plan documents. These types of failures could take the form of a failure to include required language (for example, in the case of a change in law) or the inclusion of impermissible provisions (which, of course, may also result in a failure to comply with 403(b) regulations).
Finally, EPCRS will be available to employers who failed to adopt a written plan document by December 31, 2009, as generally required under the final 403(b) regulations. Late adopters can correct that error under the Voluntary Compliance Program (VCP) component of EPCRS. VCP corrections are made by submitting of an application, with supporting documentation, to the IRS. VCP applicants must also pay a user fee determined by the number of participants covered by the subject plan. As an incentive to encourage affected employers to make use of the VCP program, the IRS will cut the applicable user fee by 50% for applications submitted by the end of 2013 if the sole failure is the late adoption of a plan document.
Most employee benefits professionals have had very positive experiences correcting errors under EPCRS. We urge 403(b) plan sponsors to take full advantage of the expanded correction opportunities under EPCRS and, if the failure is late adoption of a plan document, to do so in 2013 (while the bargain fees remain in effect).