By Pension and Benefits Editorial Staff
The IRS has issued a limited update to the Employee Plans Compliance Resolution System (EPCRS) that expands eligibility under the Self-Correction Program (SCP) in order to permit correction of certain plan document failures and select plan loan failures, including the failure to obtain spousal consent and allowing an excess number of loans. The update, which also provides new methods for correcting operational failures by plan amendment under SCP, is intended to facilitate compliance with the qualification rules while also reducing the attendant costs and burdens of compliance.
April 19, 2019 effective date. The update modifies and supersedes the most recent consolidated statement of the correction programs under EPCRS that were set forth in Rev. Proc. 2018-52. The modifications are effective April 19, 2019.
Scope of SCP. The Self-Correction Program is only available for operational failures. An operational failure is broadly defined as a qualification failure that arises solely from the failure to follow plan provisions.
Operational failures are further divided into two categories: insignificant and significant operational failures. Sponsors of qualified plans, Code Sec. 403(b) plans, SEPs and SIMPLE IRAs that have established compliance practices and procedures may, at any time, self-correct “insignificant operational failures” without notice to the IRS and without paying any fee or sanction. Significantly, SCP may be used to correct insignificant operational failures even if the plan or plan sponsor is under examination and even if the operational failure is discovered during the examination.
Sponsors of qualified plans that are the subject of a favorable determination letter from the IRS may further correct significant operational failures and plan document failures without payment of any fee or sanction. The correction must be completed within a specified period of time. There is no limit on the number of years that this mechanism can be used.
Correction of plan document failures. The sponsor of a qualified plan or 403(b) plan that is otherwise eligible to correct under SCP may now further use SCP to correct certain plan document failures. However, SCP may not be used to correct the initial failure to adopt a qualified plan or the failure to adopt a written 403(b) plan document.
Note: The late adoption of discretionary amendments is not considered to be a plan document failure.
Plan must have favorable letter from IRS. Consistent with treating plan document failures as significant failures, IRS stresses that plan document failures may be corrected under SCP only if the plan, as of the date of correction, is subject to a favorable IRS letter and the correction is made within the specified SCP two-year correction period.
Note: SCP has not been expanded to cover demographic and employer eligibility failures. These failures must be addressed under the Voluntary Correction Program (VCP) or Audit CAP.
Correction of operational failures by retroactive plan amendment. New rules have been adopted for the correction of operational failures by plan amendment under SCP. Under Rev. Proc. 2018-52, a plan sponsor could adopt an amendment to conform the terms of the plan to the plan’s prior operations for operational failures listed in section 2.07 of Appendix B. Under the new correction rules, an operational failure may be corrected by plan amendment under SCP if: (1) the plan amendment would result in an increase of a participant’s benefit, right, or feature, (2) the increase in the benefit, right, or feature is available to all eligible employees, and (3) providing the increase in the benefit, right or feature is permitted under the Internal Revenue Code and satisfies the applicable correction principles.
Uniform increase in benefits. A sponsor may not use SCP to retroactively amend a plan to conform to the plan’s operation if the operational failure did not provide for a uniform increase in benefits, rights or features to all employees eligible to participate in the plan. However, the IRS notes, a retroactive amendment may be available under VCP or Audit CAP.
Correction of plan loan failures. Rev. Proc. 2018-52 authorized the correction of plan loan failures through VCP or Audit CAP. The revised procedures now allow certain plan loan failures to be corrected under SCP.
Errors relating to the failure to repay a plan loan according to plan terms (a defaulted loan) may be corrected under SCP. However, while SCP has been expanded to cover plan loan failures, the applicable methods for correcting a defaulted loan have not been changed. Thus, correction is implemented by either a single-sum repayment (encompassing all missed payments plus interest), re-amortization of the outstanding loan balance (including interest), or a combination of the two.
Note: The SCP correction method is not available if the maximum period for repayment of the loan specified under Code Sec. 72(p)(2)(B) has expired.
Caution: The Department of Labor’s Voluntary Fiduciary Correction Program (VFC Program) provides for a no-action letter for a defaulted loan failure corrected under VCP, provided the conditions of the VFC Program are met. Such no action letters are conditioned on the inclusion of a VCP compliance statement, among other requirements. The IRS cautions that DOL has advised that it will not issue a no-action letter unless such failures are corrected under VCP.
Plan loan statutory failures not covered under SCP. Failures related to: (1) plan loans that are made in excess of the loan limits under Code Sec. 72(p)(2)(A), or (2) plan terms that do not meet the maximum repayment term requirement of Code Sec 72(p)(2)(B) or the level amortization requirements of Code Sec. 72(p)(2)(C), may be corrected only under VCP or Audit CAP.
Reporting of deemed distributions in year of correction. In the event a plan loan failure is not corrected, the resultant deemed distribution must be reported on Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) with respect to the affected participant. Rev. Proc. 2018-52 permitted a plan sponsor (under VCP or Audit CAP) to report the deemed distribution on Form 1099-R in the year of correction (instead of the year of the failure). However, the plan sponsor needed to specifically request that relief. Under the revised procedures, a sponsor (under SPC, VCP, or Audit CAP) will not be required to request the reporting relief in order to report the deemed distribution in the year of correction.
Correction of failure to obtain spousal consent for loan. A new correction method has been authorized for failure to obtain spousal consent for a plan loan. Under the new correction method, the plan sponsor must notify the affected participant and spouse, so that the spouse can provide spousal consent.
Failure to obtain spousal consent. In the event spousal consent is not obtained, SCP is not an option and the failure must be corrected under VCP or Audit CAP.
Expanding SCP to correct excess plan loans by retroactive plan amendment. A plan sponsor may now correct a failure resulting from granting a number of plan loans that exceeds the number of loans permitted under a plan by adopting a plan amendment in accordance with correction methods set forth in Appendix B. The plan must be amended retroactively to provide for the plan loans that were made available.
Under revised Appendix B, Sec. 2.07(3) the plan sponsor may correct the operational failure by plan amendment if: (1) the amendment satisfies Code Sec. 401(a), (2) the plan as amended would have satisfied the qualification requirements of Code Sec. 401(a) (and the requirements applicable to plan loans under Code Sec. 72(p)) had the amendment been adopted and effective when plan loans were first made available, and (3) plan loans (including plan loans in excess of the number permitted under the terms of the plan) were available to either all participants, or solely to one or more participants who were nonhighly compensated employees.
VCP submissions must be made electronically Plan sponsors had been allowed to mail paper VCP submissions to the IRS through March 31, 2019. The transition rule has been removed and all VCP submissions must now be made electronically using Pay.gov.
SOURCE: IRS Rev. Proc. 2019-19.
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