IRS Issues Temporary Guidance on Updated EPCRS

In late 2022, President Biden signed the SECURE Act 2.0 into law as part of the Consolidated Appropriations Act of 2023. The legislation included comprehensive changes designed to improve access to retirement saving accounts and make it easier to grow individual retirement savings. While many of the updates targeted workers, there were also some designed to make starting and administering an employer sponsored retirement plan easier and less costly. One important provision was contained in Section 305, which calls for an expansion of the Self Correction Program (SCP) under the IRS Employee Plans Compliance Resolution System (EPCRS). Specifically, plan sponsors are now able to self-correct eligible inadvertent failures under certain conditions. However, since the IRS had not yet issued updated guidance, many plans were unable to take advantage of the change.

Last month, the agency issued IRS Notice 2023-43 which provides interim guidance in the form of questions and answers. The update contains information about when a plan may self-correct an inadvertent error before the expected update of Revenue Procedure 2021-30, Introduction to Employee Plans Compliance Resolution System.  There is also self-correction information relevant to IRA custodians as well. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Inadvertent Plan Failure Corrections

The guidance provides specific information about inadvertent errors which may be resolved using the SCP. A plan sponsor can correct this error type, including those that related to loan failures, under the following conditions:

• The failure was not identified by the Secretary prior to any actions demonstrating a specific commitment to implement a self-correction for the failure.
• The self-correction is completed within a reasonable time after the error was discovered.
• The plan failure is not considered egregious and does not relate to an abusive tax avoidance transaction.
• The self-correction satisfies all other provisions identified in Revenue Procedure 2021-30 including that a sponsor must have established procedures to promote compliance, must apply the correction principles and rules of general applicability, and may use identified correction methods.
• A plan sponsor may not use a prohibited self-correction method.

There is also information about the type of plan failures which may not be resolved using the SCP, including:

• A failure to initially adopt a written plan under Code Sections 401(a), 403(a), 403(b), 408(k), or 408(p).
• A failure in an orphan plan.
• A significant failure in a terminated plan.
• A failure that involves excess contributions to a SEP or SIMPLE IRA plan and that is corrected by permitting the excess contributions to remain in an affected participant’s IRA. 
• An operational failure corrected by a plan amendment that conforms the terms of the plan to the plan’s prior operations in a manner that is less favorable for a participant or beneficiary than the original terms of the plan. 
• A failure occurring in a SIMPLE IRA plan with a plan document that does not consist of either (a) a model Form 5305-SIMPLE or 5304-SIMPLE adopted by the plan sponsor in accordance with the instructions on the applicable form, or (b) a prototype SIMPLE IRA plan that has a current favorable opinion letter and that has been amended in accordance with the procedures set forth in Rev. Proc. 2002-10. 
• A failure in an ESOP that involves Section 409, in which tax consequences other than plan disqualification are associated with the failure.

Plan Errors Identified by the Secretary

There was also a question about when a plan error will be treated as being identified by the Secretary and is therefore no longer eligible to participate. An inadvertent eligible failure can no longer be corrected once the plan comes under an examination. The only exception is when the plan sponsor, prior to undergoing an examination, demonstrated a specific commitment to implement a self-correction with respect to the failure.

A specific commitment to resolve the error will be determined by accounting for all the facts and circumstances. However, actions must demonstrate the plan is actively pursuing correction of the identified failure. It is important to note that completion of an annual compliance audit or adoption of a general statement of intent to correct failures when discovered will not be interpreted as demonstrating a specific commitment.

Other Important Updates

• Self-correction of an eligible inadvertent error that results in an excise tax will not automatically be waived.
• There are no new recordkeeping requirements imposed on plans using self-correction for this type of error resolution.
• Plans retain the option to submit a voluntary correction program (VCP) to correct these failures, including those related to participant loan failures.

Contact Us

The recently issued guidance provides specific information on how the SCP can be used to correct eligible inadvertent failures before final guidance is implemented. This is certainly welcome news for plan sponsors seeking to take advantage of the change. If you have questions about the information outlined above or need assistance with your next benefit plan audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.