IRS Updates the EPCRS Correction Program (Rev. Proc. 2021-30)

The Internal Revenue Service ("IRS") issued an updated version of the Employee Plans Compliance Resolution System ("EPCRS") on July 15, 2021. The previous version of EPCRS was set forth in Revenue Procedure 2019-19. The update, Revenue Procedure 2021-30, modifies and supersedes that version.

The new edition of EPCRS brings several changes including:

Expanded guidance on the recoupment of overpayments;
Elimination of the anonymous submission procedure under the Voluntary Correction Program ("VCP");
Addition of a free and anonymous VCP pre-submission conference procedure;
Extended correction period for significant failures under the Self-Correction Program ("SCP");
Expanded ability to correct errors under the SCP by plan amendment; and
Extended availability of the safe harbor correction method for certain elective deferral failures related to automatic contribution features in 401(k) and 403(b) plans.

The new EPCRS is generally effective July 16, 2021. However, the extension of the safe harbor correction method related to automatic contribution features is effective January 1, 2021. In addition, the: (1) elimination of anonymous VCP submissions, and (2) availability of anonymous pre-submission VCP conferences, take effect January 1, 2022.

Significant Changes

The most significant changes for plan sponsors include the: (1) addition of a free and anonymous VCP pre-submission conference procedure; (2) extended correction period for significant failures under the SCP; (3) expanded availability to correct errors by plan amendment; and (4) new guidance on the recoupment of overpayments.

Elimination of Anonymous VCP Submission Procedure

Prior to the update, plan sponsors could submit a VCP application anonymously and reach an agreement about the correction before revealing the plan sponsor and the plan's identity. Anonymous submissions were useful in the case of especially egregious errors and/or errors for which EPCRS did not clearly provide an acceptable correction method.

Effective January 1, 2022, the anonymous VCP procedure is eliminated. However, as noted below, free and anonymous VCP pre-submission conferences will be available.

Free and Anonymous VCP Pre-Submission Conference Procedure

The new EPCRS eliminates the availability of anonymous VCP applications. However, it simultaneously introduces the availability of free and anonymous VCP pre-submission conferences.

The anonymous VCP pre-submission conference allows the representatives of plan sponsors to confer with the IRS about a proposed correction before submitting the formal VCP application and identifying the plan sponsor. The new EPCRS offers these conferences for matters on which a compliance statement may be issued under EPCRS if:

The requested correction method is not described as a safe harbor correction method under Appendix A or B of EPCRS; and
The plan sponsor is eligible and intends to submit an application under VCP.

The new anonymous conferences will be held at the discretion of the IRS. The IRS will offer oral feedback about the error and proposed correction; however, the guidance will be advisory and non-binding.

Representatives seeking a conference must submit the Form 8950 via Pay.gov. The IRS expects to modify the instructions to Form 8950 to address this new procedure.

Extended Correction Period for Significant Failures Under SCP

The SCP allows plan sponsors to self-correct insignificant operational failures at any time, but they may correct significant operational failures only within a specified period. Prior to the new EPCRS, the self-correction deadline for significant operational failures was generally the last day of the second plan year following the plan year in which the failure occurred.

The new EPCRS extends the end of the self-correction period for significant operational failures to the last day of the third plan year following the plan year in which the failure occurred.

This change also affects the deadline for the safe harbor correction method for employee elective deferral failures in 401(k) and 403(b) plans. Under this safe harbor, elective deferral failures can be corrected with reduced qualified non-elective contributions ("QNECs") by certain deadlines. Elective deferral failures that do not exceed three months can be corrected without any QNEC under some circumstances. Failures that exceed three months but do not exceed the SCP correction period for significant failures may be corrected with a 25% QNEC. Thus, the extension of the correction period for significant failures under the SCP extends the safe harbor deadline for correcting elective deferral failures with a 25% QNEC.

Expanded Ability to Correct by Plan Amendment Under SCP

The prior version of EPCRS expanded the ability of plan sponsors to correct operational failures by plan amendment. This allowed sponsors to amend a plan to conform the terms of the plan with the plan's operations and thereby correct a failure. However, the ability to take advantage of SCP required that these corrective amendments, among other things, result in an increase of a benefit, right, or feature that applied to all employees eligible to participate in the plan.

The new version of EPCRS still requires that corrective amendments result in an increase of a benefit, right, or feature. However, that increase is no longer required to apply to all employees eligible for the plan. This is a helpful change for plan sponsors, as operational failures often do not affect all employees eligible to participate.

New Guidance on Recoupment of Overpayments

Prior versions of EPCRS allowed plans not to require certain participants and beneficiaries to return overpayments to the plan. Overpayments include payments from defined contribution and defined benefit plans that exceed either the amount payable under plan terms or limitations under the Internal Revenue Code ("Code"). In certain circumstances, overpayments may be corrected by retroactive plan amendments. In other cases, EPCRS offers the new correction methods described below.

The following rules generally apply to the correction of overpayments.

For periodic payments, future payments must be reduced as soon as practicable either to reflect the correct amount payable or to satisfy a limitation under the Code;
The plan sponsor must notify the overpayment recipient in writing that the overpayment is not eligible for favorable tax treatment; and
Generally, the amount of the overpayment must be contributed to the plan by the plan sponsor or another person.

Overpayments from Defined Benefit Plans

With regard to overpayments from defined benefit plans, the new EPCRS offers two exceptions to the requirement that the amount of the overpayments must be contributed to the plan: (i) the funding exception correction method, and (ii) the contribution credit correction method.

Funding Exception Method. For Plans subject to Code Section 436, no corrective payment is necessary if the certified or presumed AFTAP applicable on the date of correction is at least 100% (or if, for multiemployer plans, the most recent annual funding certification indicates the plan is not in critical, critical and declining, or endangered status). Future benefit payments to the overpayment recipient must be reduced to the correct amount. No further corrective payments from any party are required, and no further reductions to future benefit payments to an overpayment recipient, or his/her spouse or beneficiary, are permitted. In addition, no further corrective payments from an overpayment recipient, or his/her spouse or beneficiary, are permitted.
Contribution Credit Method. Under this method, the amount of overpayments required to be repaid to the plan is the amount of overpayments reduced (but not below zero) by:
- The cumulative increase in the plan's minimum funding requirements attributable to overpayments; and
- Certain additional contributions in excess of minimum funding requirements paid to the plan after the first overpayment was made.

As with the funding exception method, future benefit payments to the overpayment recipient must be reduced to the correct amount. If the amount of overpayments is reduced to zero after the contribution credit is applied, no further corrective payments from any party are required, and no further reductions to future benefit payments to an overpayment recipient, or his/her spouse or beneficiary, are permitted. In addition, no further corrective payments from an overpayment recipient, or his/her spouse or beneficiary, are permitted.

Importantly, neither of these methods may be applied to overpayments associated with a failure to satisfy a statutory limit.

Additionally, at first review, it appears that these methods may not apply to governmental plans, which are not subject to Code Section 436. We are continuing to evaluate this issue and anticipate making comments to the IRS arguing for inclusion of governmental plans.

Overpayments from Defined Contribution Plans

With regard to overpayments from defined contribution plans, the new EPCRS clarifies that a plan may permit an overpayment recipient to choose the method of repayment applicable to the overpayment, and that such method may include an installment agreement (in addition to lump sums and reductions of future payments, as permitted in the prior EPCRS).

Other Changes

Extended Availability of Safe Harbor Correction Method for Elective Deferrals Under Automatic Contribution Features

EPCRS provides a safe harbor correction method for certain elective deferral failures affecting employees who are subject to an automatic contribution feature in a 401(k) or 403(b) plan. Pursuant to this safe harbor, if a failure to implement an automatic contribution feature or a failure to implement an affirmative election of an employee subject to an automatic contribution feature does not extend beyond 9 ½ months following the end of the plan year of the failure, no QNEC is required if specified conditions are met. These conditions include timely commencement of correct deferrals and timely provision of notice of the failure to the impacted employee(s). The prior version of EPCRS offered this safe harbor correction method only for failures that began on or before December 31, 2020.

The new EPCRS extends the safe harbor by three years, to failures that begin on or before December 31, 2023.

Closing Thoughts

Overall, the new EPCRS is beneficial for plan sponsors and offers additional flexibility to complete plan corrections under both the SCP and VCP. Sponsors should confer with their advisors on the implementation of these options.

The IRS has requested that any comments regarding the new EPCRS be submitted to the IRS by October 14, 2021.

For additional information, please contact Gary Blachman, Kathleen Sheil Scheidt, Tara Sciscoe, Chris Sears, Sara Funke, Melissa Proffitt, Austin Anderson, Ian Minkin, Rob Gauss, Audra Ferguson-Allen, Lisa Harrison, Lindsay Knowles or the Ice Miller Employee Benefits attorney with whom you regularly work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.