IRS Updates EPCRS and Expands Self-Correction Program in Rev. Proc. 2019-19

Practical Law Legal Update w-020-0810 (Approx. 7 pages)

IRS Updates EPCRS and Expands Self-Correction Program in Rev. Proc. 2019-19

by Practical Law Employee Benefits & Executive Compensation

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 now certain 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 September 2018 through Rev. Proc. 2018-52 (see Legal Update, Rev. Proc. 2018-52 Modifies EPCRS by Requiring Use of Pay.Gov for VCP Submissions and Fee Payments).

Revenue Procedure 2019-19: Changes to EPCRS

With the revisions under Rev. Proc. 2019-19, EPCRS will permit plan sponsors to self-correct more plan failures. Certain plan document and plan loan failures can now be corrected using SCP instead of VCP. In addition, retroactive amendments to correct certain operational failures may be permissible using SCP.

Plan Loan Failures

Rev. Proc. 2019-19 expands SCP to cover certain loan failures, including:

Defaulted loans (see Defaulted Loans).
The failure to obtain spousal consent where required (see Failure to Obtain Spousal Consent).
The issuance of loans that exceed the number of loans allowed under the plan (see Number of Loans Exceeds Plan Limit).

Plan sponsors may not use the SCP to correct failures involving:

Loans that exceed statutory limits on the amount of the loan (26 U.S.C. § 72(p)(2)(A)).
Plan loan terms that do not meet maximum repayment term and level amortization requirements (26 U.S.C. § 72(p)(2)(B)-(C)).

(See Practice Note, Qualified Retirement Plan Loans: Requirements of Code Section 72(p).)

Defaulted Loans

A participant's failure to repay a loan can now be corrected through SCP by either:

The participant paying a single lump-sum that includes all missed payments plus interest on the missed payments.
The amortization of outstanding loan balance, plus interest, over the remaining period of the original loan term (or the period remaining under the maximum term provided in Code § 72(p)(2)(B) measured from the original loan date).

The two correction options may be combined.

Self-correction for defaulted loans does not apply to the Department of Labor (DOL) Voluntary Fiduciary Correction Program. The DOL will only issue a no-action letter under the Voluntary Fiduciary Correction Program if the plan sponsor corrects the defaulted loan through the VCP (not SCP) process.

Reporting of Deemed Distributions

If the plan loan failure is not corrected, the loan is treated as a deemed distribution under Code Section 72(p)(1) (26 U.S.C. § 72(p)(1)). The plan sponsor must report the deemed distribution on Form 1099-R. The prior version of EPCRS, Rev. Proc. 2018-52, permitted the deemed distribution to be reported in the year of the correction, instead of the year of the failure, but required the plan sponsor to request that relief. Rev. Proc. 2019-19 permits plan sponsors to report deemed distributions in the year of correction without requesting that relief.

Failure to Obtain Spousal Consent

The revised ECPRS adds a new method for correcting a failure to obtain a spouse's consent for a plan loan, where such consent is required. The plan sponsor must notify the participant and the spouse to obtain the spouse's consent. If the plan sponsor does not obtain spousal consent, however, it must correct the failure under the VCP or Audit CAP.

Number of Loans Exceeds Plan Limit

Plan sponsors may use a plan amendment to correct a failure resulting from the plan allowing a participant to take more plan loans than permitted under the plan. To qualify for this relief, the plan sponsor must satisfy three conditions:

The plan amendment satisfies the requirements of Code Section 401(a) (26 U.S.C. § 401(a)).
The plan, as amended, satisfies the requirements of Code Sections 72(p) (26 U.S.C. § 72(p)) and 401(a).
Plan loans, including excess loans, were available to:
- all participants; or
- one or more participants who were not highly compensated employees.

Plan Document Failures

In addition to the loan changes, plan sponsors can now use self-correction for certain plan document failures. Plan document failures eligible for correction under SCP may include:

A nonamender failure.
The failure to adopt good faith amendments.
The failure to adopt interim amendments.

Plan sponsors may not use SCP to correct a failure to timely adopt a qualified plan or written Internal Revenue Code (Code) Section 403(b) plan document.

Plan document failures are always considered significant failures. Therefore, to use the new SCP relief:

The plan document failures must be corrected within the correction period for significant failures (the end of the second plan year following the year of the failure).
As of the date the correction is made, the plan must have a "favorable letter," defined as a determination, opinion, or advisory letter.

Retroactive Plan Amendments

Operational failures can now be corrected under SCP using a retroactive plan amendment that conforms the plan terms to the plan's prior operation, if all of the following 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.

Future Changes

The IRS continues to invite comments on how to improve EPCRS. The IRS expects to provide more examples on its website about whether an operational failure is insignificant.

Plan sponsors hoping for insight on overpayments will have to wait. The IRS states they are "currently developing guidance" on potential changes relating to the recoupment of overpayments.

Practical Implications

The user fee for a VCP submission currently ranges from $1,500 to $3,500, depending on total plan assets. The SCP expansion should reduce the number of VCP submissions that plan sponsors must make, thereby saving the time and expense involved in preparing a submission.

As participant loans are a frequent source of errors in 401(k) plans, plan sponsors should pay particular attention to the loan changes. Even with the changes, not all loan failures can be self-corrected. Plan sponsors who want to self-correct plan document failures will need to closely monitor timing to ensure corrections are made within the correction period that applies to significant failures.

IRS Updates EPCRS and Expands Self-Correction Program in Rev. Proc. 2019-19 | Practical Law