In July 2021, the Internal Revenue Service (IRS) issued new guidance on the Employee Plans Compliance Resolution System (EPCRS). The updated guidance, Revenue Procedure 2021‐30, replaces the previous version of EPCRS in Revenue Procedure 2019‐19. The EPCRS covers correction programs for:
- Self‐Correction Program (SCP) – correct certain plan failures without contacting the IRS or paying a user fee.
- Voluntary Correction Program (VCP) – correct failures not eligible for SCP or to get approval from the IRS to ensure that the failures were properly corrected.
- Audit Closing Agreements – to resolve failures discovered during an IRS audit that cannot be corrected using SCP.
The following highlights the significant updates and revisions to the correction programs:
Extension of Self Correction period
Under the new Revenue Procedure 2021-30, the timeline to self-correct operational failures that qualified as “significant failure” has been extended from two to three years, effective July 16, 2021.
Streamlined Process to Correct Operational Failures
The new principles remove the requirement that all participants in the plan benefit from a retroactive amendment, making it easier to use retroactive plan amendments to correct operational failures under the self-correction program. This is also effective July 16, 2021.
Elimination of Anonymous VCP Submissions
Effective January 1, 2022, anonymous VCP submissions will no longer be processed by the IRS. However, the IRS will permit plan sponsors or representative to make a written anonymous request for a pre-submission conference to discuss a potential VCP submission at no cost to the plan sponsor. After such a conference, the plan sponsor can send a VCP submission. Pre-submission conferences are not required. All VCP submissions can no longer be anonymous.
Increased Threshold for De Minimis Correction Amounts
Previously, where plan participants received an overpayment of $100 or less, the plan sponsor was not required to seek repayment of the amount from the participant or notify the participant that the overpayment is not eligible for favorable tax treatment. Overpayment amounts of $100 or less were considered de minimis under Revenue Procedure 2019-19. The new guidance increased the threshold from $100 to $250.
Additional Options for Overpayment Corrections
Effective July 16, 2021, Revenue Procedure 2021-30 expanded correction principles allowing plan sponsors to fix operational failures when plan participants or beneficiaries receive payments that are in excess of the plan’s written terms. Under the new principles, participants or beneficiaries who received overpayments need not repay the plan, and in certain instances, do not require the plan sponsor to reimburse the plan for overpayments to participants.
EPCRS Revenue Procedure 2021-30 outlines four options that can be utilized, effective July 16, 2021, to resolve overpayments:
- Oftentimes, if the overpayment is below the $250 threshold, no action is needed. However, if the overpayment was due to a violation of a statutory limit, the beneficiary must be notified by the plan that the overpayment is not subject to favorable tax treatment.
- In situations where the plan owes additional amounts to participants who previously received overpayments, the overpayment may be recovered by reducing payments made in the future.
- Participants are given the option to repay overpayments over a period of time or with installments.
- The overpayment can be resolved by amending the plan document with retroactive effect to align the plan’s terms with the amount distributed to the participant. This amendment must conform to the rules on plan amendments in general under EPCRS.
Additionally, for certain overpayments made from a defined benefit plan, EPCRS Revenue Procedure 2021-30 outlines two new correction methods as follows:
1. The funding exception correction method
Under this method, if the plan’s funding level is sufficient at the time of correction, it’s not necessary to recover overpayments from the plan sponsor or the participant who received the overpayment.
2. The contribution credit correction method
Under this method, the required repayment amount to the plan is reduced (or even eliminated) by the amount of increase in funding as a result of classifying overpayment as a liability in the following years’ funding calculations. Future payments to the beneficiary must be adjusted at the correct level, and the participant or beneficiary need not make any further payments. This method cannot be used if the plan has a funding deficiency or an unpaid minimum required contribution.
Author: Akanksha Gupta, Associate Manager | [email protected]
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