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Rev. Proc. 2021-30 Updates EPCRS and Expands Guidance on Recouping Overpayments
Practical Law Legal Update w-031-9343 (Approx. 7 pages)
Rev. Proc. 2021-30 Updates EPCRS and Expands Guidance on Recouping Overpayments
by Practical Law Employee Benefits & Executive Compensation
| Published on 19 Jul 2021 • USA (National/Federal) |
The Internal Revenue Service (IRS) issued Revenue Procedure 2021-30 (Rev. Proc. 2021-30), which updates the Employee Plans Compliance Resolution System (EPCRS) by expanding the guidance on recouping overpayments, providing additional time to correct significant failures under the Self-Correction Program (SCP), and replacing anonymous submissions under the Voluntary Correction Program (VCP) with anonymous pre-VCP submission conferences.
On July 16, 2021, the Internal Revenue Service (IRS) issued Revenue Procedure 2021-30 (Rev. Proc. 2021-30), which updates and modifies the Employee Plans Compliance Resolution System (EPCRS). The revised EPCRS is generally effective beginning July 16, 2021.
EPCRS Background
The IRS established EPCRS to help sponsors of qualified retirement plans correct errors that could adversely affect the tax qualification of a plan (qualification failures). There are three programs within EPCRS that allow plan sponsors to correct errors:
- Self-Correction Program (SCP). This program allows an eligible plan sponsor to correct certain operational failures and plan document failures without a submission to the IRS.
- Voluntary Correction Program (VCP). This program allows the plan sponsor to correct qualification failures by making a submission and paying a user fee to the IRS.
- Audit Closing Agreement Program (Audit CAP). This program allows the plan sponsor to correct qualification failures found during an IRS examination that have not been previously corrected under SCP or VCP.
EPCRS classifies failures as either significant or insignificant. The classification affects whether SCP or VCP is available, as well as the deadline for making corrections. To learn more about EPCRS, see:
The last comprehensive update to EPCRS was made in April 2019 through Rev. Proc. 2019-19 (see Legal Update, IRS Updates EPCRS and Expands Self-Correction Program in Rev. Proc. 2019-19).
Revenue Procedure 2021-30: Changes to EPCRS
The updated EPCRS includes additional guidance on recouping overpayments to plan participants. In addition, plan sponsors will have more time to correct significant failures under the SCP. While anonymous VCP filings will no longer be permitted, the updated EPCRS includes a new option of requesting an anonymous, pre-VCP submission conference.
Recouping Overpayments
Under Rev. Proc. 2019-19, if a plan makes an overpayment to a participant or beneficiary of $100 or less, the plan sponsor is not required to:
- request return of the overpayment; or
- notify the participant or beneficiary that the overpayment is not eligible for favorable tax treatment accorded to distributions from a qualified plan and is not eligible for a tax-free rollover.
Rev. Proc. 2021-30 increases the threshold amount from $100 to $250.
Regarding the existing methods for correcting overpayments, Rev. Proc. 2021-30 modifies the correction method that permits the plan sponsor to require repayment of the overpayment. Plan sponsors may permit repayment by:
- A lump-sum payment.
- An installment agreement.
- Adjustment of future payments.
The revised EPCRS also includes two new methods for correcting overpayments from defined benefit plans:
- Funding exception correction method.
- Contribution credit correction method.
Under the funding exception correction method, a plan subject to the funding-based restrictions under Code Section 436 (26 U.S.C. § 436) is not required to demand recoupment of overpayments, provided that:
- For single employer plans, the plan's certified or presumed adjusted funding target attainment percentage (AFTAP) is at least 100% on the correction date (see Practice Note, Benefit Restrictions Under Code Section 436: Adjusted Funding Target Attainment Percentage).
- For multiemployer plans, the plan's latest annual funding notice provides that the plan is not in critical, critical and declining, or endangered status on the correction date (see Practice Note, Multiemployer Pension Plans and Standard Document, Annual Funding Notice for Multiemployer Pension Plans).
The plan must reduce future benefit payments to the participant or beneficiary who received the overpayment to the correct amount. After benefit payments are reduced to the correct amount, the revised EPCRS does not permit the plan to further reduce benefits or require corrective payments.
Under the contribution credit correction method, the overpayment amount that must be repaid to the plan is reduced by a "contribution credit." The contribution credit is the overpayment amount minus:
- The increase in minimum funding requirements related to the overpayments for the period between:
- the plan year for which the overpayments are taken into account for purposes of plan funding; and
- the end of the plan year before the plan year for which the corrected amount is taken into account for purposes of plan funding.
- Certain other excess contributions paid to the plan after the first overpayment was made.
If, after applying the contribution credit, the amount of overpayments is reduced to zero, the revised EPCRS does not permit the plan to further reduce benefits or require corrective payments. If, however, application of the contribution credit does not reduce the overpayments to zero, then the plan sponsor must take additional steps to reimburse the plan.
Changes to the SCP
Rev. Proc. 2019-19 provided that operational failures could be corrected under SCP using a retroactive plan amendment that conforms the plan terms to the plan's prior operation, if the following conditions are met:
- The plan amendment would result in an increase in benefits, rights, or features.
- The increase in benefits, rights, or features would be available to all eligible employees.
- The increase in benefits, rights, or features:
- is permitted under the Code; and
- complies with the series of correction principles set out in Rev. Proc. 2019-19, Section 6.02.
Rev. Proc. 2021-30 eliminates the condition that the plan amendment resulting in an increase in benefits, rights, or features be available to all eligible employees.
In addition, Rev. Proc. 2021-30 extends the correction period under the SCP for significant failures by one year (see Practice Note, Correcting Qualified Plan Errors Under EPCRS: Effect of Determination of Significant Failure on SCP: Two-Year Limit). Under the revised EPCRS, significant failures must be corrected under the SCP by the end of the third plan year, rather than the second plan year, following the year of the failure.
This extension also extends the safe harbor method for employee elective deferral failures (EEDFs) that exceed three months but do not extend beyond the SCP correction period for significant failures (see Practice Note, Correcting Qualified Plan Errors Under EPCRS: Safe Harbor for EEDFs That Exceed Three Months).
Changes to the VCP
Beginning January 1, 2022, VCP applications may no longer be submitted anonymously. The revised EPCRS permits plan sponsors to instead request a free, anonymous conference with the IRS before submitting a VCP application. Plan sponsors may only request a pre-VCP submission conference if the:
- IRS could issue a compliance statement on the issue.
- Requested correction method is not a safe harbor correction method.
- Plan sponsor is eligible to participate in the VCP and plans to submit a VCP application.
To request a pre-VCP submission conference, plan sponsors or their representatives must file Form 8950 via Pay.gov. The IRS anticipates issuing revised instructions for Form 8950 that address the new pre-VCP submission conference procedures.
If a conference request is granted, the IRS will provide oral feedback regarding the failure and proposed correction methods. This feedback is non-binding, however, and cannot be relied on to obtain relief under the EPCRS or Code Section 7805(b) (26 U.S.C. § 7805(b)).
Changes to Audit CAP
Under the revised EPCRS, sanctions imposed under Audit CAP must be paid online via Pay.gov.
Safe Harbor for Employee Elective Deferral Failures
Rev. Proc. 2021-30 extends the availability of the alternative correction method for EEDFs associated with missed elective deferrals for employees subject to automatic contributions under a Code Section 401(k) plan or 403(b) plan (including employees who made affirmative elections in lieu of automatic contributions). Under the safe harbor, if the failure does not extend beyond a period of 9 ½ months after the end of the plan year in which the failure occurred, the employer is not required to provide qualified non-elective contributions (QNECs) for the missed elective deferrals if certain conditions are met (see Practice Note, Correcting Qualified Plan Errors Under EPCRS: Safe Harbor Correction for Automatic Contribution Arrangements).
This safe harbor was subject to a sunset provision and was available only to plans for failures that began on or before December 31, 2020. Rev. Proc. 2021-30 delays the sunset of this safe harbor by three years, making it available to plans with failures that begin on or before December 31, 2023.
Comment Request
The IRS continues to invite comments on how to improve EPCRS. Comments on Rev. Proc. 2021-30 are due by October 14, 2021.
Practical Implications
Rev. Proc. 2021-30 is the most significant change to EPCRS in more than two years. The guidance is notable in the new flexibility available to plan sponsors in correcting overpayments to participants or beneficiaries. Sponsors of defined benefit plans in particular should review the guidance carefully and evaluate any changes to the plan's procedures when fixing overpayments. In addition, plan sponsors of 401(k) plans with automatic contribution arrangements now have confirmation that the safe harbor method for correcting EEDFs is available for an additional three years.