IRS Issues Revenue Procedure Revising Plan Corrections Under EPCRS Programs

Copyright 2008 Institute of Management & AdministrationAll Rights Reserved Managing 401(K) Plans

November 2008

HUMAN RESOURCES Vol. 2008 No. 11

1722 words

IRS Issues Revenue Procedure Revising Plan Corrections Under EPCRS Programs

Main article

The Internal Revenue Service recently released Revenue Procedure 2008-50, which revises the agency's program for voluntary corrections of retirement plan qualification errors.

Rev. Proc. 2008-50, which updates and supersedes Rev. Proc. 2006-27, streamlines many of the correction procedures and adds new correction options under the Employee Plans Compliance Resolution System (EPCRS), the IRS said.

Practitioners can use the schedules in an expanded Appendix F in Rev. Proc. 2008-50 document as submission and compliance statements under the IRS Voluntary Correction Program (VCP), Joyce Kahn, manager of employee plans voluntary compliance programs at the IRS, noted.

The IRS tried to make the VCP submission process "as complete, as objective, and as simple as possible so small employers would not necessarily need special help to craft one of these," Kahn said.

Kahn also said she would encourage plan sponsors to use the standardized forms in Appendix D for other voluntary corrections because the IRS has reduced the complexity to a "check the boxes" simplicity, based on feedback from practitioners.

"This is a product of a partnership, and we‘d like to continue that partnership," Kahn said.

Voluntary Compliance

The IRS's voluntary corrections programs in EPCRS apply to qualified plans under tax code Section 401(a), Section 403(b) tax-deferred annuity plans, simplified employee pensions (SEP), and savings incentive match plans for employees in the form of individual retirement accounts (SIMPLE IRAs).

EPCRS operates at three levels:

The Self-Correction Program (SCP) lets plan sponsors correct relatively minor operational errors without notifying the IRS or incurring any penalties;

The Voluntary Correction Program (VCP) lets sponsors pay a limited penalty fee and submit a corrective plan to the IRS for approval; and

The Audit Closing Agreement Program (Audit CAP) lets sponsors correct serious errors discovered during an IRS audit, for which they must pay a penalty fee.

Under the updated EPCRS provisions, which are effective Jan. 1, 2009, plan sponsors for the first time can use the SCP option to correct plan operational errors even if the plan is under IRS examination, the IRS said.

The new rules also streamline the procedures for correcting plan errors using the VCP option and in many cases reduce the penalty fee for correcting errors. For the first time, practitioners can use the VCP option to correct loan mistakes, minimum distribution errors, excessive elective deferrals, plans established by ineligible employers, and failures to amend plans to accommodate law changes, the IRS said.

Changes From the Prior Procedure

In Rev. Proc. 2008-50, Section 2, IRS identified 24 revisions from the prior program.Among the revisions are the following:

expanding the definition of "plan loan failure" to include violations of tax code Section 72(p)(2), which limits the amount available for loans and when and how they must be repaid to the plan;

expanding the scope of the SCP on substantial completion of corrections as of the date the plan or its sponsor is considered to be under examination and expanding the sample correction methods;

expanding correction methods to include catch-up contributions in elective deferrals;

expanding the correction methods for failure to include eligible employees in a 401(k) plan;

revising the requirements for submitting determination letter applications when correcting certain qualification failures by plan amendments;

adding a factor to be considered in determining if a correction method is reasonable and appropriate;

clarifying that the earnings rates derived from the Labor Department's Voluntary Fiduciary Correction Program (VFCP) online calculator may be used to determine the earnings adjustment for corrections if it is not feasible to make a reasonable estimate of the actual investment results; and

providing that if the total corrective distribution due a participant or beneficiary is $75 or less, the plan sponsor is not required to make the corrective distribution if the reasonable costs of processing and distributing the distribution would exceed that amount.

Practitioners' First Take

Thomas Schendt, a partner at the law firm Altston & Bird, Washington, D.C., told us the updated EPCRS is "a well-crafted piece of guidance that demonstrates the IRS's understanding of the realities of plan operation."

Schendt said the updated procedure "expands the correction process by addressing more types of errors, providing more alternative methods of correcting mistakes, and providing a more streamlined process of applying for correction with the IRS."

Seth Tievsky, a principal in the national tax department at Ernst & Young, Washington, D.C., said he had a favorable first-impression of the EPCRS amendments, which he described as "a boatload of favorable changes and adjustments."

Tievsky said the programmatic improvements are helpful for plan sponsors, practitioners, and the IRS. By keeping track of problems with submissions and using that information to improve the EPCRS, IRS officials have made life easier for everyone, including themselves, he said.

"I see so much of this as being in the spirit of what Congress intended when it enacted the Pension Protection Act," Tievsky said.

Two changes are especially welcome, he said. The IRS liberalized the time frame it allows for plan sponsors to identify and correct systemic problems under the SCP option. It also expanded excise tax relief for plan participants who mistakenly receive early distributions. Under the PPA, the IRS was authorized to consider additional forms of tax relief under VPC. "That's a great advantage," Tievsky said. Before the PPA, he added, the service had no way to waive those excise taxes.

Comments Requested

The public may mail comments on the updated EPCRS procedures to the Internal Revenue Service, Attention: SE:T:EP:RA:VC, 1111 Constitution Ave., N.W., Washington, DC, 20224. The IRS is asking for suggestions about future EPCRS enhancements, including methods for correcting the failure to implement automatic enrollment provisions in 401(k) plans and for correcting errors related to Roth IRA accounts.

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Sidebar: New IRS Revenue Procedure Eases Rules for Fixing Mistakes in Retirement Plan Loans

Plan sponsors could find it easier to correct errors in loans to retirement plan participants because of new standardized forms and amended rules in the Internal Revenue Service's Revenue Procedure 2008-50, an IRS employee plans official said recently.

Rev. Proc. 2008-50, which the IRS released August 14 (see accompanying story), made several changes in the voluntary program for correcting loan errors under the agency‘s Employee Plans Compliance Resolution System (EPCRS). With those changes, plan participants will be better able to avoid having delinquent plan loans treated as taxable distributions, said Joyce Kahn, manager of employee plans voluntary compliance programs at the IRS.

Loan error corrections can be made through the agency‘s Voluntary Correction Program (VCP), one of three correction programs available under EPCRS, the IRS said. The VCP program lets employers with qualified retirement plans pay a limited penalty fee and submit a corrective plan to the IRS for approval. The other two correction programs under EPCRS are the Self-Correction Program (SCP) and the Audit Closing Agreement Program (Audit CAP).

Eligibility Rules

To be eligible to use the voluntary correction programs, employers must have a qualified plan under tax code Section 401(a), a Section 403(b) tax-deferred annuity plan, a simplified employee pension (SEP), or a savings incentive match plan for employees in the form of an individual retirement account (SIMPLE IRA), the IRS said.

Easing of the rules on Form 1099-R reporting and greater flexibility for dealing with defaulted loans and other loan problems represent significant changes in the EPCRS, Seth Tievsky, a principal in the national tax department of Ernst & Young, noted.

Specifically, the IRS amended the rules for correcting loan problems by amending Rev. Proc. 2008-50 to include a sentence that notifies plan sponsors that they can use the VCP as an alternative to reporting a participant's loan as a deemed distribution on Form 1099-R in the year the error was corrected. Tievsky said the new relief is not available unless it is specifically requested in the VCP.

The IRS also added a new paragraph that is a notice to plan sponsors that the section's rules for qualified plan loans apply even if the plan does not require loans to satisfy the requirements of Section 72(p)(2). For compliance with other programs, the new language adds, qualified plans must contain provisions requiring that loans comply with Section 72(p)(2)(A), (B), and (C) if plan sponsors use the Labor Department's Voluntary Fiduciary Correction Program to correct any fiduciary violations.

Relief for Serious Errors

The IRS also amended Section 14 on Audit CAP program sanctions to reflect changes in how the IRS determines the penalty fees it charges for the most serious types of loan errors.

New language notifies plan sponsors that the maximum penalty for making participant loan errors will include the tax that the IRS could otherwise collect if the plan loan had not been excluded from gross income. An additional sentence the IRS added says that in determining financial penalties for serious loan errors under the Audit CAP program, the IRS will take into account the extent to which the employer or the employer's agents are solely to blame for the loan error, as well as the extent to which the employee or beneficiary might be solely to blame.

Rev. Proc. 2008-50 includes a couple of new documents in its Appendix F that plan sponsors could find helpful in dealing with loan problems, the IRS said. Schedule 5 and Schedule 9 are standardized documents that sponsors can use as submission and compliance statements for correcting loan errors. Schedule 9 is also a form that sponsors can use to correct loan errors by making a plan amendment.

The new revenue procedure containing the loan revisions is effective Jan. 1, 2009. However, the IRS said plan sponsors may apply the provisions of the revenue procedure beginning September 2 of this year.

Sidebar: New IRS Revenue Procedure Eases Rules for Fixing Mistakes in Retirement Plan Loans

October 20, 2008