IRS Issues Interim Guidance on SECURE 2.0 Act Changes to EPCRS

Practical Law Legal Update w-039-5982 (Approx. 7 pages)

IRS Issues Interim Guidance on SECURE 2.0 Act Changes to EPCRS

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 plan document failures without a submission to the IRS.
Voluntary Correction Program (VCP). This program allows the plan sponsor to correct plan 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 plan 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 July 2021 through Rev. Proc. 2021-30 (see Legal Update, Rev. Proc. 2021-30 Updates EPCRS and Expands Guidance on Recouping Overpayments).

SECURE 2.0 Act Expands EPCRS

In December 2022, SECURE 2.0 expanded EPCRS to permit any eligible inadvertent failure, including failures relating to plan loans, to be self-corrected within a reasonable period after the failure is identified, except for:

Failures that the IRS discovers before actions are taken to self-correct.
Egregious failures.
Failures involving the misuse or diversion of plan assets.
Abusive tax avoidance transactions.

In addition, SECURE 2.0 expanded EPCRS to allow IRA custodians to correct certain eligible inadvertent failures.

SECURE 2.0 directs the IRS to update Rev. Proc. 2021-30 to reflect these changes within two years of the Act's enactment date, which means the IRS must update the Revenue Procedure by December 29, 2024.

For more information on SECURE 2.0, see Legal Update, SECURE 2.0 Act Makes Comprehensive Changes to Retirement Plans.

Notice 2023-43 Provides Interim Guidance on SECURE 2.0 Act Changes

In light of the SECURE 2.0 changes, the IRS is issuing interim guidance on EPCRS that applies until the IRS updates Rev. Proc. 2021-30. The guidance is not intended to be comprehensive regarding SECURE 2.0 changes and does not address failures involving recovery of plan overpayments and automatic contribution errors.

Self-Correction of Eligible Inadvertent Failures

Notice 2023-43 provides that before Rev. Proc. 2021-30 is updated to reflect SECURE 2.0 , plan sponsors may self-correct eligible inadvertent failures, including failures related to plan loans, as long as:

The failure was not identified by the IRS before the plan sponsor took any actions demonstrating a specific commitment to self-correct the failure (see Failures That Are Discovered by the IRS).
The self-correction is completed within a reasonable period after the failure was identified (see Reasonable Period for Correcting Failures).
The failure is not egregious and does not directly or indirectly relate to an abusive tax avoidance transaction.
The self-correction satisfies all relevant provisions in Rev. Proc. 2021-30, including that the plan sponsor:
- has established practices and procedures reasonably designed to comply with the Code;
- applies the correction principles and rules of general applicability (see Practice Note, Correcting Qualified Plan Errors Under EPCRS: General Correction Principles);
- may self-correct using a correction method in Appendices A and B (see Practice Note, Correcting Qualified Plan Errors Under EPCRS: Pre-Approved Corrections); and
- may not use a prohibited correction method.

Notice 2023-42 states that when correcting eligible inadvertent failures, however, plan sponsors are not subject to the provisions in Rev. Proc. 2021-30 that:

Require plans to have a "favorable letter" (defined as a determination, opinion, or advisory letter).
Prohibit self-correction of demographic and employer eligibility failures, significant failures in SEPs and SIMPLE IRAs, and certain loan failures.
Allow significant operational failures to be self-corrected under the SCP only if they are substantially corrected before a plan examination occurs.
Require significant failures to be corrected before the end of the third plan year after the plan year in which the failure occurred.

The guidance also provides that certain inadvertent failures may not be self-corrected before Rev. Proc. 2021-30 is updated. These include:

Failure to adopt a written plan.
Orphan plan failures.
Significant failures in terminated plans.
Certain failures concerning excess contributions to SEPs or SIMPLE IRAs.
Demographic failures that are corrected using a method not found in the Treasury regulations.
Operational failures that are corrected by a plan amendment that results in less favorable terms for participants and beneficiaries.
Certain failures involving SEP or SIMPLE IRA plan documents.
Failures in ESOPs that involve certain tax consequences relating to Internal Revenue Code Section 409.

Failures That Are Discovered by the IRS

According to Notice 2023-43, a plan failure is considered discovered by the IRS when the plan or plan sponsor is subject to an IRS examination. Once a failure is identified by the IRS, the plan sponsor may not self-correct unless it can show there was a pre-examination commitment to self-correct the failure. Insignificant failures, however, may be self-corrected regardless of whether the plan sponsor is under examination or the failure is discovered during the examination.

Regarding whether a plan sponsor has demonstrated a pre-examination commitment to self-correcting the failure, the IRS indicates that it will base its determination on the facts and circumstances. The IRS notes, however, that:

A plan sponsor must show it is actively working to correct the failure.
Completing an annual compliance audit or expressing intent to correct the failure is not enough to demonstrate a commitment to self-correcting the failure.

Reasonable Period for Correcting Failures

When determining whether a failure is corrected within a reasonable period, the IRS will look at the facts and circumstances. Notice 2023-43 provides that a reasonable period generally means by the last day of the 18th month after the failure is identified by the plan sponsor. For employer eligibility failures, however, a failure will be treated as being corrected within a reasonable period if the plan sponsor:

Promptly stops making plan contributions after identifying the failure.
Corrects the failure by the last day of the sixth month after identifying the failure.

Excise or Additional Tax

Notice 2023-43 also states that self-correcting an eligible inadvertent failure for which an excise or additional tax applies does not result in a waiver of the tax. Instead, the plan sponsor may request a waiver through a VCP application or, if the issue cannot be corrected through EPCRS, through the IRS's Voluntary Closing Agreement Procedure.

IRA Custodians

Notice 2023-43 does not permit IRA custodians to correct eligible inadvertent failures under EPCRS before Rev. Proc. 2021-30 is updated.

Miscellaneous

In addition, Notice 2023-43 clarifies that:

Plan sponsors may self-correct an eligible inadvertent failure that occurred before December 29, 2022 (SECURE 2.0's enactment date).
Plan sponsors may correct an eligible inadvertent failure by submitting a VCP application.
SECURE 2.0 did not impose new recordkeeping requirements for self-correction of eligible inadvertent failures. Plan sponsors should continue complying with the existing requirements.

Practical Implications

Plan sponsors may rely on the guidance in Notice 2023-43 until the IRS updates Rev. Proc. 2021-30. For plan sponsors that self-corrected a failure after SECURE 2.0 was enacted (December 29, 2022) but before the IRS issued Notice 2023-43, the IRS will view the plan sponsor as having applied a good faith, reasonable interpretation of SECURE 2.0 if the self-correction is consistent with the interim guidance in Notice 2023-43.

The IRS invites comments on the interim guidance and SECURE 2.0. Comments on Notice 2023-43 are due by August 23, 2023.

IRS Issues Interim Guidance on SECURE 2.0 Act Changes to EPCRS | Practical Law