IRS Issue Guidance for Plan Corrections

IRS Provides Welcome Relief for Plan Sponsors!

Mistakes happen! It is inevitable because the rules governing retirement plans are complex and always changing. The IRS Employee Plans Correction Resolution System (EPCRS) has done wonders in allowing plan sponsors to correct mistakes, often without seeking approval from the IRS, and avoid costly sanctions and fines.

On March 27, 2015 the IRS released Rev. Proc. 2015-27 which was immediately followed by the release of Rev. Proc. 2015-28 on April 2, 2015. Collectively, the two new procedures make welcome changes to EPCRS which can result in significant cost savings for employers.

These rules take the program up a notch, most notably, by allowing for discounted fees for plan loan corrections and new ways to correct employee deferral failures that are much less costly for the employer!

The most significant changes made to EPCRS by Rev. Proc. 2015-27 are highlighted below:

Plan Loan Failures – A new fee schedule was added that provides deeply discounted fees for employers that need to correct plan loan failures. This relief applies when the loan failure(s) is the only mistake that needs to be corrected and the correction does not impact more than 25% of plan participants.

Note: All plan loan corrections require filing under the Voluntary Correction Program (VCP) to seek IRS approval; this makes filing much more attractive for employers).

Required Minimum Distribution Plan Failures – A new fee schedule was added that also provides discounted fees for corrections made under VCP for plans that have a failure(s) to issue required minimum distributions in a timely manner. This is a welcome change as employers may request the 50% excise tax applicable to late required minimum distributions be waived, so filing under this program is now much more viable for employers.

This type of failure can be corrected under the Self-Correction Program (SCP) but the participant is responsible for requesting a waiver of the 50% excise tax when their file their individual income tax return.

Overpayments – The IRS clarified that the employer does not always need to seek repayment for plan participants for overpayments; the overpayment may be restored to the plan by the employer or, in certain situations, the plan may be retroactively amended to correct the defect.

Rev. Proc. 2015-28 provides targeted relief for plan sponsors who have employee deferral failures (e.g. failure to implement an employee's deferral election in a timely manner, failure to auto-enroll a participant in a plan that includes an automatic enrollment arrangement, failure to include an eligible employee from the deferral provisions under the plan, etc.). This much awaited guidance provides substantial savings to employers who find errors early and correct them quickly!

The procedure provides three new ways to correct employee deferral failures. Previously, the employer had to make a corrective contribution equal to 50% of the missed deferrals, plus any related matching contributions, adjusted for earnings.

Plans that Include an Automatic Contribution Feature – Provided corrections are made no later than the last day of the second plan year following the plan year in which the failure first occurred, the employer no longer has to make a corrective contribution for missed deferrals as long as certain conditions are satisfied such as providing a notice to the participants who were affected by the failure. The employer, however, still must make up any missed matching contributions, along with related earnings, based on the full missed deferral.

Plans that have Employee Deferral Failures that do not Extend Beyond Three Months – In general, provided corrections are made no later than the end of the month following the month in which the error was discovered, the employer no longer has to make a corrective contribution for missed deferrals as long as certain conditions are satisfied such as providing a notice to the participants who were affected by the failure. The employer, however, still must make up any missed matching contributions, along with related earnings, based on the full missed deferral.

Plans that have Employee Deferral Failures that Extend Beyond Three Months but not Beyond the Last Day of the Second Plan Year Following the Plan Year in which the Failure First Occurred – Under this new rule, the employer must only make a 25% corrective contribution for missed deferrals (i.e. 25% x the missed deferral) provided certain conditions are satisfied which are similar to those discussed above.

Let's face it; mistakes happen. It is important for employers to periodically review their plans to determine if any errors have occurred so that the mistakes can be correctly quickly!

If you would like to learn more about EPCRS, or how we can help you in conducting a plan compliance review, please contact us to learn more!

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