The IRS has issued a comprehensive update of the Employee Plans Compliance Resolution System (EPCRS). Most significantly, the IRS is modifying Rev. Proc. 2019-19 to clarify and expand the options available for the recoupment of overpayments under defined benefit plans.
Among the modifications, the IRS is:
- clarifying that sponsors of defined benefit plans may provide recipients of overpayments the option of repaying an overpayment in a single sum, through an installment agreement, or through an adjustment in future payments;
- providing two new benefit overpayment correction methods that encourage sponsors of defined benefit plans to avoid seeking recoupment of benefit overpayments made to participants and beneficiaries, either by not requiring correction if the plan satisfies a specified funding level, or by limiting the amount to be recouped under certain circumstances;
- eliminating the anonymous submission procedure under VCP, effective January 1, 2022;
- adding an anonymous, no-fee, VCP pre-submission conference procedure, effective January 1, 2022;
- extending the end of the SCP correction period for significant failures from 2-3 years (i.e., from the last day of the second plan year following the plan year for which the failure occurred to the last day of the third plan year following the plan year for which the failure occurred), effective July 16, 2021 (Note: this provision also effectively extends the safe harbor correction method for employee elective deferral failures lasting more than three months but not beyond the extended SCP correction period for significant failures);
- expanding the ability of a plan sponsor to correct an operational failure under SCP by plan amendment by eliminating the requirement that a plan amendment increasing a benefit, right, or feature apply to all eligible plan participants;
- extending by three years (from December 31, 2020 to December 31, 2023) the sunset of the safe harbor correction method available for certain elective deferral failures associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a 401(k) plan or 403(b) plan (from December 31, 2020, to December 31, 2023); and
- increasing from $100 to $250 the threshold for certain de minimis amounts for which a plan sponsor is not required to implement correction.
New correction methods. The IRS is providing two new overpayment correction methods: (1) the funding exception correction method and (2) the contribution credit correction method. The new correction methods, the IRS explains, will reduce the need for defined benefit plans to seek recoupment from overpayment recipients and ease the process for overpayment recipients repaying overpayments, while balancing the interest of other participants in the plan.
Funding exception correction method. Under the funding exception correction method, corrective payments will not be required for a plan subject to Code Sec. 436 (which applies limits on unpredictable contingent event benefits, plan amendments, lump-sum distributions, and benefit accruals to single-employer defined benefit plans that fall below specified funding levels), if the plan’s certified or presumed adjusted funding target attainment percentage (“AFTAP”) that is applicable to the plan at the date of correction is equal to at least 100 percent (or, in the case of a multiemployer plan, the plan’s most recent annual funding certification indicates that the plan is not in critical, critical and declining, or endangered status (as defined in Code Sec. 432), determined at the date of correction).
Plan sponsors are cautioned that future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount. However, for purposes of EPCRS, no further corrective payments from any party are required. Moreover, no further reductions to future benefit payments to an overpayment recipient, or any spouse or beneficiary of an overpayment recipient, are permitted. Similarly, no further corrective payments from an overpayment recipient, or any spouse or beneficiary of an overpayment recipient, are authorized.
Contribution credit correction method. Under the contribution credit correction method, the amount of overpayments required to be repaid to the plan is the amount of the overpayments reduced (but not below zero) by: (A) the cumulative increase in the plan’s minimum funding requirements attributable to the overpayments (including the increase attributable to the overstatement of liabilities, whether funded through cash contributions or through the use of a funding standard carryover balance, prefunding balance, or funding standard account credit balance), beginning with (1) the plan year for which the overpayments are taken into account for funding purposes, through (2) the end of the plan year preceding the plan year for which the corrected benefit payment amount is taken into account for funding purposes; and (B) certain additional contributions in excess of minimum funding requirements paid to the plan after the first of the overpayments was made. This reduction in the overpayment amount is termed the “contribution credit.”
The IRS notes that future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount. For purposes of EPCRS, if the amount of the overpayments is reduced to zero after the contribution credit is applied, no further corrective payments from any party are required. In addition, no further reductions to future benefit payments to an overpayment recipient, or any spouse or beneficiary of an overpayment recipient, are permitted, and no further corrective payments from an overpayment recipient, or any spouse or beneficiary of an overpayment recipient, are allowed. However, the IRS adds, if a net overpayment remains after the application of the contribution credit, the plan sponsor or another party must reimburse the plan for the remainder of the overpayment.
Source: Rev. Proc. 2021-30.
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