The IRS has clarified the correction of certain retirement plan operational failures under its Employer Plan Compliance Resolution System (EPCRS) and modified the correction program in other ways that are useful to retirement plan sponsors. Rev. Proc. 2015-27 is effective July 1, 2015, but plan sponsors may choose to apply its provisions beginning with the date of its release.
Currently, there are three types of corrections available under EPCRS:
- Self-correction program (SCP): Retirement plan sponsor may correct insignificant mistakes and avoid paying fees or filing documents with the IRS;
- Voluntary correction program (VCP): Permits a plan sponsor, prior to the plan audit, to obtain IRS approval of a proposed correction; and
- Audit closing agreement (Audit CAP): Plan sponsor corrects any errors discovered by the IRS during audit and pays a sanction.
Following these corrections, plan sponsors can maintain the qualified (or tax-advantaged) status of its plan.
Rev. Proc. 2015-27 Clarifications
The IRS found that employers have attempted to recover large overpayments from plan participants and beneficiaries, particularly where errors in plan administration have occurred over an extended period of time, and have not considered other ways to correct the error. As defined in EPCRS, an “overpayment” occurs when a payment is made to a participant or beneficiary that exceeds the amount owed to that individual under the terms of the plan, or that exceeds payment limitations under the Internal Revenue Code or Treasury Regulations. The following clarifications have been made:
- Clarification of Correction Rules for Overpayments Made to Participants.
According to the IRS, some employers have interpreted EPCRS to require recoupment of any overpayment, including large amounts paid over a long period of time due to plan administration error, resulting in financial hardship to affected participants.
- Instead of pursuing a recovery from a participant, the employer itself may contribute the overpaid amount, plus earnings, into the plan
- The IRS requests comments on issues related to overpayments such as circumstances under which employers should be required to make corrective contributions rather than recouping the overpayment from the participant, and whether special rules are appropriate if the overpayment is a result of calculation errors
- Lowers the Compliance Fee for Voluntary Correction Program (VCP) Submissions if the only failure being reported is a failure to comply with minimum required distributions under IRC Section 401(a)(9).
- The lowest rate, $500, now applies to plans with up to 150 participants, where previously it was limited to plans with 50 or fewer participants
- The rate for plans with between 151 and 300 participants is now $1,500. Previously, a plan with 300 participants would be required to pay a compliance fee of $5,000 even if this were the only failure.
- Lowers the compliance fee for plans if the only failure is an error related to plan loans under IRC Section 72(p), which limits the amount and timing of repayment on such loans
- There is now a lower tiered fee schedule for loan failures affecting up to 150 participants ranging from $300 to $3,000 based on the number of affected participants
- Modifies the Self-Correction Program for IRC Section 415(c) Annual Additions Failures
Section 415(c) limits the total amount that can be contributed on behalf of each participant. Under previous guidance, the period for correcting was 2-1/2 months after the end of the affected plan year.
- The new guidance extends this period to 9-1/2 months.
- For 2015, the limit is $53,000 (including pre-tax, after-tax and employer contributions)
- To correct excess annual additions, the excess amount must be paid out to the participant or forfeited as applicable
The IRS also released EPCRS guidance in Revenue Procedure 2015-28 relating to the failure to implement automatic contribution arrangements or salary deferral elections by employees. Under previous requirements, employers had to make a 50% make-up contribution to the plan to correct these failures (not including the match that the employee’s deferrals would have generated). However, many employers view this as an unfair windfall to affected employees—the employees received 50% contribution in addition to regular compensation.
The new guidance modified EPCRS in the following ways:
- If the failure to implement the automatic contributions is fixed within 9-1/2 months after the end of the plan year during which the failure occurred or, if notified by the affected employee, the first payroll after the end of the month following the month of the notification, the only contribution the employer will have to make is the amount of the match that would have been associated with the employee deferrals had they been implemented in a timely fashion.
- Employees must be given a notice no later than 45 days after the date on which corrections begin
- For employees not choosing an investment election, earnings attributable to the missed contributions may be calculated based on the plan’s default investment alternative
- This correction method is only available for failures occurring prior to Dec. 21, 2020. The IRS will then consider whether it will extend the safe harbor correction method, taking into consideration whether there is an increase in the number of plans implemented with automatic contribution features.
- If failures to properly implement employee elective deferrals are corrected within three months, no employer contribution is required. If failures are corrected after three months but prior to the end of the second year following the year of the failure, the employer must make a corrective contribution of 25 percent of the missed deferrals.
If you have any questions related to Rev. Proc. 2015-27 clarifications or any matters regarding your retirement plan design, we can help. Please contact Charles J. Farro, Marsh & McLennan Agency formerly Benefits Resource Group, at (216) 393-1812 or firstname.lastname@example.org for more information.