The following highlights the significant updates and revisions to the correction programs:
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.
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.
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.
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.
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:
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@example.com