Revenue Procedure 2019-19: Enhancements to EPCRS are Great News for Plan Sponsors
Newly published Revenue Procedure 2019-19 modifies and supersedes prior IRS guidance regarding the Employee Plans Compliance Resolution System (EPCRS) to allow plan sponsors to self-correct an expanded number of problems that may affect retirement plan operations or documents. The new guidance, which took effect April 19, 2019, provides a significant opportunity for plan sponsors to correct loan defaults and other minor operational failures without going through the expensive and often time consuming voluntary correction program (VCP) procedure.
Prior to Revenue Procedure 2019-19, plan sponsors were required to file a VCP application seeking IRS approval of a retroactive amendment unless the sponsor was amending the plan solely to allow for hardship distributions or loans. Under the new guidance, a plan sponsor may correct an operational failure by retroactive plan amendment without submitting a VCP application if three conditions are satisfied:
(1) the amendment results in an increase of a benefit, right, or feature (such as the rate of matching contributions);
(2) the increase is available to all eligible employees; and
(3) the increase otherwise satisfies the general correction principles in the Revenue Procedure.
The Revenue Procedure also allows plan sponsors to correct certain plan document failures (such as the failure to timely correct a disqualifying provision) without filing a VCP application. The expanded self-correction method is available if:
(1) the plan has received a favorable determination or opinion letter;
(2) the error is not the failure to timely adopt a qualified plan or a written 403(b) plan document; and
(3) the correction occurs by the end of the second plan year following the year in which the plan document failure occurred (the self-correction period).
Perhaps most helpful to a large number of employers, the new guidance expands the scope of loan failures that can be self-corrected. First, plan sponsors may now report a deemed distribution in the year of correction rather than in the year of the failure without submitting a VCP application. Second, plan sponsors may increase the number of loans available to a single participant by retroactive amendment so long as the amended plan would satisfy legal requirements and plan loans were available to all participants or participants who are non-highly compensated employees. Third, plan sponsors can self-correct the failure to obtain spousal consent prior to taking a plan loan.
Finally, plan sponsors may now correct loan defaults – through single sum repayment, reamortization of the loan balance, or a combination of the two – without filing a VCP application. This is great news for plan sponsors. Under prior guidance, plan sponsors were required to seek IRS approval of any attempt to restructure a defaulted loan. Following the elimination of the reduced VCP fee for loan defaults, it could be very expensive for a plan sponsor to file a VCP application for the simple purpose of correcting a defaulted loan. In addition, because of the time necessary for the IRS to process a VCP application, plan sponsors were often in the difficult position of reamortizing a loan pending IRS approval to allow the loan recipient adequate time for repayment before the expiration of the maximum loan term. Now, however, plan sponsors can confidently move forward with implementing a loan default correction without waiting for IRS approval. Corrections for loans that exceed the statutory maximum amount or term, or that do not satisfy the level amortization requirement, must still be corrected through the VCP process or Audit Cap.
The IRS has rightly concluded that an expansion of the self-correction process will promote voluntary compliance for retirement plans and reduce the costs and burdens of compliance on employers. And the IRS intends to offer examples on its website that will help plan sponsors identify significant versus insignificant operational failures, which may also expand the use of the self-correction procedure.
Even the best run plans have to be corrected now and again. If you have questions about how to correct an operational or documentation failure affecting your retirement plan, contact an employee benefits attorney at Verrill.