Section 305 of SECURE 2.0 expands the Employee Plans Compliance Resolution System (EPCRS) set forth in Rev. Proc. 2021-30 to increase opportunities for self-correction of plan errors. Section 305 requires EPCRS to be updated to conform to the statute no later than 2 years after its enactment. IRS Notice 2023-43 provides interim guidance to plan sponsors until Rev. Proc. 2021-30 is updated.
Rev. Proc. 2021-30 is the latest version of EPCRS, the IRS’ comprehensive system of correction programs for sponsors of retirement plans that have failed to comply with one or more of the applicable qualification requirements. Under EPCRS there are three ways plan sponsors may correct plan failures:
· Self-Correction Program (SCP) allows correction of a failure(s) without contacting the IRS or paying a fee,
· Voluntary Compliance Program (VCP) allows correction of a failure(s) at any time before a plan audit by obtaining IRS approval of the correction and payment of a user fee ($1,500-$3,500) by the plan sponsor, and
· Audit Closing Agreement Program (Audit CAP) allows correction after a failure is identified by a plan audit and requires payment of an IRS sanction by the plan sponsor.
Under Rev. Proc 2021-30, certain failures are not eligible for correction under SCP. These include some plan loan failures, certain plan document failures, and employer eligibility and demographic failures.
Section 305 of SECURE 2.0 continued a trend already evident in the evolution of EPCRS. It makes the correction program easier to use by expanding the kinds of failures available for self-correction and eliminating the deadline for correction of significant errors and the requirement to have a favorable IRS determination letter. EPCRS allows only insignificant failures to be corrected at any time. Section 305 provides that any eligible inadvertent failure may be corrected under EPCRS at any time as long as two very important conditions are met: (1) the failure has not been identified by the IRS before any actions that demonstrate a specific commitment to implement self-correction with respect to the failure; andr (2) self-correction is completed within a reasonable time after identification of the failure.
Section 305 also expands self-correction to allow IRA custodians to correct failures without excise tax and to return distributions to an inherited IRA by a non-spouse beneficiary.
What is an Eligible Inadvertent Failure?
“Eligible inadvertent failure” is defined as a failure that occurs even though the plan’s current practices and procedures satisfy standards set forth in EPCRS (i.e., practices and procedures reasonably designed to promote overall compliance and routinely followed but insufficient to prevent a failure from occurring). A plan document alone is not evidence of establishment of practices and procedures. Correction of the failure may not violate any other IRS requirement. Any failure that is egregious, diverts or misuses plan assets or is directly or indirectly related to an abusive tax shelter is not an eligible inadvertent failure.
Notice 2023-43 provides (1) an eligible inadvertent failure may be self-corrected before Rev. Proc. 2021-30 is updated provided the exceptions do not apply and the conditions for correction are satisfied, (2) an IRA custodian may not correct an eligible inadvertent failure before Rev. Proc. 2021-30 is updated and (3) serves as interim interpretative guidance in a Q&A format regarding correction of eligible inadvertent failures.
Reasonable Correction Period
Allowing corrections to be made without a specific deadline provides plan sponsors with tremendous flexibility in identifying and correcting plan failures. However, once the plan sponsor identifies a failure, it must be corrected within a reasonable period. Whether correction is made within a reasonable period is determined by considering all relevant facts and circumstances. The IRS will treat a correction that is made within 18 months following the date the failure is identified (as opposed to 3 years after a significant failure occurred under EPCRS) as having been completed within a reasonable time. Consider that the 3-year requirement for correction under EPCRS has now been removed by Section 305 and replaced with the 18-month safe harbor. Is the safe harbor in keeping with the spirit of the statute? Is 18 months sufficient time to correct? The IRS does not explain why an 18-month safe harbor for correction was created but some part of the rationale for an 18-month safe harbor is probably to encourage timely correction by plan sponsors once a failure is identified. For those situations in which correction is not completed within the safe harbor because, for example, the correction is too complicated or not completely under the plan sponsor’s control, whether the correction period is reasonable will be based on all relevant facts and circumstances.
Actions Showing Specific Commitment to Correct
The other limit placed on the correction period under Section 305 involves a failure identified by the IRS before any actions by the plan sponsor are taken that demonstrate a specific commitment to implement self-correction of a failure. Again, whether actions taken by the plan sponsor demonstrate a commitment to implement self-correction is based on facts and circumstances. The IRS states that the plan sponsor must be actively pursuing correction of a specific failure and makes clear that a general statement of intent to correct failures when they are discovered is not sufficient to demonstrate a specific commitment to correct a failure. Clearly, a case in which the plan sponsor has made some corrections but not fully completed the correction process would be considered actively pursuing correction. Other cases are not so clear. Consider the following situations:
· the plan sponsor has retained a consultant to make corrections but none have actually been made.
· documentation that is needed to make corrections has been requested by the plan sponsor from the recordkeeper, but the documentation has not yet been provided.
· the plan sponsor fully documents the intended correction procedure, but no corrections have actually been made.
Do these situations indicate a commitment to correct? Hopefully more guidance from the IRS is forthcoming.
Waiver of Excise Tax/Additional Tax
The expansion of EPCRS stops short of automatically waiving an excise tax or additional tax when a failure that is subject to such tax is corrected. Under Section 305, EPCRS must be expanded so that IRA failures may be corrected by the custodian with a waiver of excise taxes or additional taxes related to the failure. It is not clear whether a filing is required in order to obtain the tax waiver. That question has been answered for qualified plans. A plan sponsor who self-corrects a failure must still apply for a waiver of the penalty taxes through a VCP application and payment of a user fee. Why not have a consistent approach for all plans? And, because the user fee, in some cases, may be more than the excise or additional tax (plus the expense to prepare and file a VCP application), IRS should immediately consider waiving the VCP user fee for excise taxes/additional taxes that are related to correction of a failure under Section 305.
Establishment of Practices and Procedures
As required throughout all of the changes made to EPCRS and reiterated under Section 305, plan sponsors using self-correction must be able to demonstrate that there are established practices and procedures in place that are reasonably designed to promote and facilitate overall compliance with IRC requirements.
In keeping with the policy set forth in the correction programs that plans have practices and procedures in place designed to ensure compliance, plan sponsors are encouraged to regularly:
· Review and update plan documents to reflect law changes, plan amendments and administration changes, and
· Conduct compliance reviews of plan administration, timely and fully correct any failures that are identified and fully document the review and all steps involved in making corrections.
By taking these steps, plan sponsors can improve administration of the plan, identify failures promptly, thereby minimizing corrections, and be prepared with documentation of corrections that avoids audit cap in the event of an audit or other inquiry by the IRS, and satisfies any other government agency.