The Internal Revenue Service (IRS) has modified the Employee Plans Compliance Resolution System (EPCRS), which is the IRS correction program for retirement plans. In general, EPCRS allows retirement plan sponsors to correct plan mistakes and continue to provide retirement benefits on a tax-favored basis. It includes self-correction without IRS involvement, voluntary correction with IRS approval, and correction during audit under a closing agreement.
The recent modifications to EPCRS are found in Revenue Procedure 2015-27 and Revenue Procedure 2015-8. They are a welcomed relief to employers who have discovered and need to correct past errors.
Revenue Procedure 2015-27:
Rev. Proc 2015-27 clarifies correction methods for overpayments and reduces compliance fees relating to plan loan failures.
Issues of overpayment typically arise from a mistake made by a plan sponsor in the calculation of a distribution. Under previous IRS guidance, a plan sponsor had to first demand repayment from the plan participants or beneficiaries as their first step toward correction. Under Rev. Proc 2015-27, in many cases an employer no longer has to seek recoupment and repayment from its participants to correct the overpayment. An employer may have the option to contribute the overpaid amount (plus earnings) to the plan. This greatly simplifies the duty to employers, who had been faced with seeking to recoup large amounts paid over time from participants; and also to the participants for whom recoupment would be a financial hardship.
A common scenario concerning loan failures occurs when an employer fails to timely establish loan repayments through payroll. In this situation, the loan becomes a distribution and is taxable to the participant – an unwelcome result for both parties. This type of failure must be corrected under Voluntary Correction Program (“VCP”) and previously the VCP fees were based on the number of plan participants, which could be thousands of dollars for a large plan. This RevProc modifies the basis for fees from plan participants to the number of loan failures.
Revenue Procedure 2015-28:
Revenue Procedure 2015-28 provides two new safe harbors: (1) a safe harbor for automatic contribution features and (2) safe harbors for failures involving elective deferrals of limited duration. These changes make several corrections under EPCRS easier and less costly.
Automatic Contribution Safe Harbor: Under prior IRS guidance, for an employer to correct automatic contribution failures, it had to make a 50 percent corrective contribution to the plan plus any required matching contributions. Under the new guidance of RevProc 2015-28, so long as the appropriate amount of deferrals begin no later than the month after the month that the employee notifies the employer of the error, or if the error is discovered by the employer, within nine and one-half (9 ½) months after the end of the plan year in which the failure occurred, then there is no corrective contribution required for the missed deferral. Employers are required to send a notice to affected employees no later than 45 days after the date on which corrections begin.
Elective Deferral Safe Harbor: Revenue Procedure 2015-18 provides a safe harbor for corrections outside of automatic enrollment. If a participant’s failure to make elective deferrals is corrected within three months, there is no corrective contribution required by the employer for the missed deferral. However, if the failure is corrected after three months but prior to the end of the second year following the year of the failure, the employer must make a corrective contribution of 25 percent of the missed deferrals (under previous guidance, employers were required to make a 50 percent corrective contribution).
RevProc 2015-27 and 2015-28 are both very positive changes for plan sponsors, and will greatly reduce the cost of correcting errors that can occur under the very complicated rules for qualified deferred compensation plans.