IRS Clarifies the Correction of Overpayments under EPCRS

The IRS has clarified the correction of certain retirement plan operational failures under its Employer Plan Compliance Resolution System (EPCRS) and expanded certain elements of the program in ways that are helpful to retirement plan sponsors. The clarifications, contained in Rev. Proc. 2015-27, address what the IRS believes is an overly narrow or strict interpretation by plan sponsors of the requirements for the correction of overpayments and modify the correction program in other ways.

EPCRS

Three modes of correction are available under EPCRS: (1) the self-correction program (SCP), where a plan sponsor may correct insignificant errors without paying a fee or filing any documents with the Service; (2) the voluntary correction program (VCP), which allows a plan sponsor, any time before plan audit, to obtain Service approval of a proposed correction; and (3) the audit closing agreement program (Audit CAP) where a plan sponsor corrects an error discovered by the IRS during audit by paying a sanction. Each correction program ensures the plan sponsor will maintain the qualified (or tax-advantaged) status of its plan following the correction. The IRS has made large scale updates to EPCRS every few years since its inception, with Rev. Proc. 2013-12 as the most recent evolution. Rev. Proc. 2015-27 does not replace Rev. Proc. 2013-12, but rather modifies it based on the observations of the Service and outside comments. Rev. Proc. 2015-27 is effective July 1, 2015, but plan sponsors may chose to apply its provisions beginning with the date of its release.

Rev. Proc. 2015-27 explains that plan sponsors have more flexibility than they may realize in correcting “Overpayments” under EPCRS. As defined in EPCRS, an “Overpayment” occurs when a payment is made to a participant or beneficiary that exceeds the amount owed to that individual under the terms of the plan, or that exceeds payment limitations under the Internal Revenue Code or Treasury Regulations. For example, an Overpayment would occur if a participant receives a distribution reflecting an incorrect assumption that the employee was fully vested in her benefit, or an employee receives an annual benefit under a defined benefit plan in excess of the Code § 415(b)(1)(A) dollar limit for that year ($210,000 in 2015). Rev. Proc. 2013-12 describes only one method for correcting an Overpayment – the plan sponsor should take “reasonable steps” to have the recipient return the amount of the Overpayment (with interest) to the plan, and should contribute (or cause another person to contribute) the difference if the amount returned is insufficient.

Clarifications Regarding Corrections of Overpayments

The IRS found that employers have attempted to recover large Overpayments from plan participants and beneficiaries, particularly where errors in plan administration have occurred over an extended period of time, and have not considered other ways to correct the error. Rev. Proc. 2015-27 addresses this by explaining that plan sponsors have more than one option when correcting Overpayments. Specifically, the new guidance explains that it may be appropriate for the employer or another person contribute the amount of the Overpayment to the plan in lieu of attempting to recoup the amount from the recipient. Alternatively, a plan sponsor may adopt a retroactive amendment to conform the terms of the plan to its operations with respect to the Overpayment. The retroactive amendment option is particularly helpful when an employer has operated the plan in a consistent manner but in a way that deviates from the plan language (perhaps because of a drafting error or some other miscommunication). In such cases it may be preferable for a plan sponsor to re-draft the plan in a way that reflects the consistent treatment of all participants, rather than attempting to recover funds from participants and beneficiaries both past and present.

Other Modifications

In addition to highlighting options available with respect to Overpayments, Rev. Proc. 2015-27 expands the availability of SCP by increasing the time period for the correction of excess annual additions to 9 ½ months. Rev. Proc. 2015-27 also clarifies that the requirement to submit a determination letter application as part of a correction does not apply when corrective amendments are made to certain pre-approved plans or when more than 12 months have passed since the distribution of substantially all plan assets following a plan termination. Finally, Rev. Proc. 2015-27 contains a series of helpful technical corrections and reduces the VCP submission fee for failures to satisfy minimum distribution requirements affecting between 51 and 300 participants and for plan loan failures affecting less than 25% of a plan sponsor’s participants.

The clarifications outlined in Rev. Proc. 2015-27 exhibit the ongoing willingness of the IRS to work with plan sponsors and encourage voluntary corrections when mistakes occur. In fact, Rev. Proc. 2015-27 asks readers to comment on whether additional guidance is needed concerning the recovery of Overpayments. EPCRS has been hugely successful and its continued refinement is a reminder that while mistakes do happen, failing to take steps to correct them is the only mistake that cannot be fixed.