On April 19, 2019, the IRS released Revenue Procedure 2019-19 expanding the self-correction program and making it more liberal and cost-effective for plan sponsors to correct mistakes. This new EPCRS guidance supersedes Revenue Procedure 2018-52.
The IRS Employee Plans Compliance Resolution System (EPCRS) allows businesses or organizations that sponsor a retirement plan to find and remedy defects and continue to provide their employees with retirement benefits on a tax-favored basis. The EPCRS program consists of the following components:
- SCP (Self-Correction Program). Under this program, the plan sponsor remedies “insignificant” errors without seeking formal blessings from the IRS.
- VCP (Voluntary Correction Program). Under this program, the business or organization applies to the IRS for relief to correct any “significant” failures.
- Audit Cap (Audit Closing Agreement Program). This program is used to take care of any qualification errors found during an IRS audit of the plan.
The industry had requested expansion of the ability to use SCP to correct certain errors and the IRS has responded favorably. This new guidance allows employers to self-correct many common errors found in their plans without the need to obtain formal approval from the IRS. What does this mean for plan sponsors? It’s a good one: it will ease compliance for plans while decreasing costs and burdens of compliance by allowing employers to self-correct in certain additional situations. Some of the major highlights of Rev. Proc. 2019-19 consist of (1) participant loan failures, (2) plan document failures, and (3) retroactive plan amendments.
Plan Document Failures
A plan has a document failure when the document lacks mandated provisions, either because it was originally drafted without the needed provisions, or because the employer failed to amend the plan on a timely basis to reflect a new law change. Typically, such a failure is considered significant and thus require filing under the VCP program. The new rule allows certain document failures to be self-corrected, with certain caveats:
- The plan must have on hand Favorable Letter
- Correction must be made within two (2) years
- The failure does not involve an error relating to adopting the plan’s original document
Participant Loan Failures
Many of the loan failures could only be corrected under VCP. The new EPCRs changes now allow self-correction in the following circumstances:
- A participant received a loan in excess of what is allowed under the loan policy. For example, employer allows a participant to consolidate her loan when the loan policy does not permit consolidations
- Spousal consent was not obtained and the plan required spousal consent for loans; and
- Planned loan payments are delinquent leading to a default of the outstanding loan balance
Retroactive Plan Amendments
The update adds new statutes for correcting operational failures by plan amendment under the SCP. Previously an employer could correct an operational failure by a plan amendment to conform to the terms of the plan to the plan’s prior operations. Under the new correction rules, an operational failure may be corrected by plan amendment under the SCP so as long as the following conditions are satisfied:
- The plan amendment will not result in an increase of a benefit, right, or feature;
- The increase in the benefit, right or feature is available to all eligible employees; and
- Providing the increase in the benefit, right or feature is permitted under the IRS Code and satisfied the correction principles of Section 6.02 Rev. Proc. 2018-42.
If you have any questions, or need help with any operational failures, please do not hesitate to reach out to Steve Wilkinson or Mizan Rahman.