While tax season is now in the rearview mirror for working Americans, there are pressing matters for
To maintain tax-qualified status, qualified retirement plans must comply with the Internal Revenue Code in both form and operation. With the increasing complexity of regulation and administration, errors are inevitable. Fortunately, many errors can be corrected under the Internal Revenue Service's (IRS) Employee Plans Compliance Resolutions System (EPCRS) to avoid disqualification. Over the years, the IRS has modified EPCRS — providing expanded opportunities for correcting without IRS approval.
In response to the "growing complexity of retirement plan administration," Congress passed
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The IRS issued interim guidance in Notice 2023-43 on May 25, 2023 to assist plan sponsors and advisers with navigating these changes. Plan sponsors can rely on the interim guidance from that date until EPCRS is formally updated.
EPCRS is comprised of three correction programs: Self-Correction Program (SCP), Voluntary Correction Program (VCP) and Audit CAP. SCP allows plan sponsors to correct insignificant failures at any time and significant failures within certain periods without contacting the IRS or paying a fee. Not all failures are eligible for SCP. VCP enables plan sponsors to voluntarily identify and correct certain errors with IRS approval, accompanied by a user fee. Audit CAP applies when the plan or sponsor is under examination, requiring a closing agreement with the IRS, corrections and a negotiated sanction.
What has changed? The interim guidance does not address all forthcoming changes. Some of the major changes to the self-corrections permitted under SECURE 2.0 include:
Self-correction of eligible inadvertent failures: Prior to SECURE 2.0, insignificant failures could be corrected under SCP at any time and significant failures could be corrected under SCP if the correction was completed by the end of the third plan year during which the failure occurred. Under new guidance, certain "eligible inadvertent failures" may be corrected under SCP within a reasonable time after identifying the failure, generally 18 months after discovery (six months for employer eligibility failures).
- Self-correction while under IRS examination: Prior to SECURE 2.0, the ability to self-correct an error (thereby avoiding sanctions) once under IRS examination was extremely limited. The correction must have been substantially completed prior to coming under examination. Under SECURE 2.0 and Notice 2023-43, an insignificant failure (including an "eligible inadvertent failure") may be corrected while under examination. An "eligible inadvertent failure" can be corrected while under examination if the plan sponsor demonstrated a specific commitment to implement self-correction. Notice 2023-43 provides that whether a failure is insignificant is determined based on the same principals set forth in EPCRS. While this appears to be a significant expansion of the rule, the IRS can take the position that even small errors are significant and challenge the ability to self-correct while under examination without sanctions.
- Expanded corrections: Certain plan loan failures and plan document failures, previously correctable only under VCP, may now be self-corrected if certain requirements are met. While not addressed in the interim guidance, SECURE 2.0 reduces the excise tax for missed RMDs and simplifies the rules for recovery of overpayments allowing, in certain cases, plan fiduciaries to choose not to recoup overpayments and permit rollovers of overpayments to remain valid.
To encourage self-correction and reduce time spent on examinations, the IRS implemented a pre-examination retirement plan compliance pilot program. It notifies plan sponsors that their plan is selected for examination and allows 90 days for plan sponsors to review their documents and operations for errors. Errors discovered may be self-corrected (if eligible) or corrected with IRS agreement and payment of the VCP fee rather than Audit CAP sanctions.
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The first phase included 100 plan sponsors, focusing on code section 415 compliance and concluded with a 72% response rate. For those who do not respond, the IRS will schedule an examination of the plan. On February 7, 2024, the IRS announced the second phase of the pilot program but has not yet identified the focus.
Although new guidance expands the ability to self-correct, plan sponsors and administrators should establish and maintain practices and procedures designed to promote compliance with the code requirements. They also should promptly correct errors in accordance with EPCRS principals swiftly upon discovery. Coordinating plan and operation reviews, identifying errors and implementing corrections can require time given that many parties are involved. The longer an error lingers, the greater likelihood that the costs of corrections and penalties increase. Not all errors can be self-corrected, and plan sponsors and administrators should ensure that EPCRS principals are followed and corrections are documented in plan records.
