The IRS issued new rules effective April 29, 2019. Revenue Procedure 2019-19 expands the use of the agency’s amnesty-type programs for employer plan sponsors. Employers who discover and correct their plan compliance items may save fees, penalties, and potential plan disqualification.
The three programs included in the IRS Employee Plans Compliance Resolution System (EPCRS) are:
- Self Correction Program (SCP) – Follow steps to correct certain errors without paying a fee. The new Revenue Procedure expands the types of errors that may now be corrected using just the SCP. This saves time and money when filing correction packages with the IRS. The correction procedure varies slightly by plan type, but can be used by employers who sponsor 401(k), 403(b), pension, profit sharing, money purchase, SIMPLE, and SEP plans, as long as the errors are discovered and corrected within a limited time period.
- Voluntary Correction Program (VCP) – Correct errors that lie beyond the SCP above, submit to IRS for review, and reach a signed compliance agreement with the IRS.
- Audit CAP – May be used to resolve failures discovered during an IRS audit that cannot be self-corrected.
The types of errors that may now be resolved using the SCP include:
Certain plan document failures: A plan document failure occurs when the plan document was not kept up-to-date or does not fully comply with the tax law. Prior to April 2019, plan document failures and corrections had to be submitted to the IRS for review and fee payment using the VCP. Now, the SCP may be used to correct some plan document failures. For a plan document error to be self-corrected, the IRS will now require the following:
- The correction must generally be completed by the last day of the second plan year following the plan year for which the failure occurred; and
- The plan must already have an IRS favorable determination letter. Note that the SCP cannot be used to correct the failure to either adopt your initial plan document or adopt a discretionary amendment in a timely manner.
Correcting operational failures by plan amendment: Some operational errors were previously eligible for self-correction and will continue to be so. These errors include: benefits that exceed the compensation maximum under Code section 417; offering hardship distributions or plan loans where the plan document does not provide for them; and premature inclusion of certain otherwise eligible employees.
The expansion will now allow additional operational failures to be corrected by plan amendment as long as:
- The plan amendment increases a benefit, right, or feature;
- The increase applies to all employees eligible to participate in the plan. For example, an error that provided increased benefits for some eligible employees, or greater increases for some, would not qualify for correction under SCP. However, such correction might still be available under VCP or Audit CAP.
- The increase is permissible under the Code and satisfies the other correction principles and any other applicable rules.
Plan loan failures: SCP may be used to correct plan loan defaults using the methods previously only available under VCP.
- Failures to obtain spousal consent for loans may be corrected under SCP by notifying the participant and spouse and obtaining consent.
- Violations of plan-imposed limits on the number of plan loans may also be corrected by a retroactive plan amendment.
- SCP still cannot be used to prevent a taxable deemed distribution when a plan loan’s terms do not properly limit the amount and length of a loan or require level amortization—only VCP or Audit CAP can be used for that. However, SCP may be used to delay reporting of a deemed distribution on default until the year of correction instead of the year of the failure.
Spousal consent for final distributions. Failures to obtain spousal consent for distributions may now be corrected using either of two alternative methods that were previously available only under VCP.
For more details on Rev. Proc. 2019-19, see the IRS webpage here.
These expanding opportunities to simplify and improve an employer’s ability to correct plan errors without fines and penalties are very welcome. Employers Council ERISA and Benefit Consulting Services has extensive experience with many types of plan corrections and can guide members through the complexities of these processes and represent employers before the IRS on a project basis.