IRS Revisions for Plan Corrections under EPCRS
In two separate pronouncements, the IRS recently issued revisions to the EPCRS, as set forth in Revenue Procedure 2013-12, in an effort to make the permitted methods for correcting errors in the administration of tax-qualified retirement plans more taxpayer-friendly.
The first revisions were outlined in Revenue Procedure 2015-27, which is generally effective July 1, 2015. However, plan sponsors may elect to apply these new provisions on or after March 27, 2015. Some of the more significant corrections affected by Revenue Procedure 2015-27 include the following:
- Overpayment of benefits to participants –The IRS has clarified that EPCRS does not require that a plan demand return of a participant overpayment due to the plan in every case.
- Excess contributions to participant accounts – The IRS will now allow self-correction of excess contributions, even if such failure occurs repeatedly, as long as the correction occurs within 9 ½ months after the end of the plan year.
- User fees charged for plans under Revenue Procedure 2013-12 – The IRS has reduced the user fees originally outlined in Revenue Procedure 2013-12 that apply to plan submissions for the following two corrections: (1) a failure to satisfy the minimum distribution requirements under IRC Section 401(a)(9), and (2) compliance with the requirements of IRC Section 72(p) in making loans to plan participants depending upon the number of affected participants.
A second set of revisions was announced shortly thereafter in Revenue Procedure 2015-28, effective April 2, 2015. This Revenue Procedure revises Revenue Procedure 2013-12 with regard to the following corrections:
- Failure to timely implement salary withholding otherwise required under an automatic contribution feature of the plan – The IRS no longer requires this failure to be corrected through a Qualified Non Elective Contribution (QNEC) equal to 50% of the participant’s “missed deferral opportunity” under the automatic arrangement if the failure does not extend beyond the end of the 9 ½ month period after the end of the plan year of the failure and certain other requirements are met. Currently this correction method is only available for such errors occurring prior to December 31, 2020.
- Failure to correctly implement a participant’s salary deferral election – The IRS has reduced the “correction payment” required of the plan sponsor seeking to correct this type of failure, depending on how quickly the failure is corrected by the plan sponsor. If certain conditions are met, no QNEC is required if corrections are made within three months of the failure. The QNEC is reduced to 25% of the participant’s “missed deferral opportunity” if made generally by the end of the second plan year following the year of failure (and possibly a longer time period, under certain circumstances).
In making corrections easier for plans adopting automatic contribution provisions, the IRS is encouraging employers to adopt plans with these automatic contribution features despite implementation errors often occurring in such plans. By expanding the types of correction options available under EPCRS, the IRS is attempting to incentivize plan sponsors to detect and correct these types of plan operational failures as soon as possible.