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Correcting Plan Errors With the Employee Plan Compliance Resolution System (EPCRS)

Steven Grieb, CEBSVice President and Senior CounselBMO Financial GroupMilwaukee, Wisconsin

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Updated EPCRS• IRS has updated the Employee Plans

Compliance Resolution System (EPCRS)• Revenue Procedure 2013-12• Issued December 31, 2012• Supersedes all prior EPCRS guidance

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Helpful Websites• Topical Index—

http://www.irs.gov/pub/irs-tege/rp13_12_topical_index.pdf

• List of Changes—http://www.irs.gov/pub/irs-tege/rp13_12_changes_chart.pdf

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Helpful Websites• EPCRS Overview—

http://www.irs.gov/Retirement-Plans/Fix-It-Guides---EPCRS-Overview

• 401(k) Fix It Guide—http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf

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EPCRS GoalPreserve tax deferred benefits for participants of:• 401(a) qualified plans• 403(b) plans• SEPs and SARSEPs• SIMPLE IRAs

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History of EPCRS• Revenue Procedure 2013-12• Revenue Procedure 2008-50• Revenue Procedure 2006-27• Revenue Procedure 2003-44• Revenue Procedure 2001-17• Revenue Procedure 2000-16• Revenue Procedure 99-31• Revenue Procedure 99-13• Revenue Procedure 98-22• Revenue Procedure 96-29• Revenue Procedure 95-24• Revenue Procedure 94-62• Revenue Procedure 94-16• Revenue Procedure 93-36• Revenue Procedure 92-89

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EPCRS Cannot Correct• Fiduciary Issues• Late Deferral Deposits• Prohibited Transactions• Missed 5500 Filings• Diversion or misuse of plan assets• Abusive tax avoidance transactions

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EPCRS Can CorrectInternal Revenue Code qualification issues, including:• Operational Failure—Failure to follow the terms

of the plan, or Code qualification requirements• Plan Document Failure—Plan document

provision violates the Code or plan operation

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EPCRS Can Correct (continued)

Internal Revenue Code qualification issues, including:• Demographic Failure—Failed rate group,

coverage, or DB minimum participation test• Employer Eligibility Failure—Employer is not

eligible to adopt the plan in question

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3 Types of EPCRS Correction• Self-Correction (SCP)• Voluntary Correction Program (VCP)• Audit Closing Agreement Program (Audit CAP)

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SCP Overview• No IRS fee or sanction• No IRS involvement• Correction by plan amendment in limited

circumstances only• Entails some uncertainty

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SCP Availability• All Operational Failures can be corrected within

two plan years• Failures older than 2 plan years can be

corrected only if “insignificant”• Significant vs. insignificant—Subjective facts &

circumstances test based upon seven factors

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SCP Availability (continued)

• SCP is available for Operational Failures only• Correction of significant failures generally

allowed only if plan has a determination letter• Must have established practices and procedures

for overall compliance• Must correct all years, not just open years

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SCP Availability (continued)

Self correction through retroactive plan amendment available for:• Compensation cap failures• Loans & hardships (when plan document did not

permit them)• Early inclusion of otherwise eligible employees

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VCP Overview• Requires a filing with the IRS, including a fee• Can be used to fix all types of failures• Provides certainty once completed• Not available if plan is under audit

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VCP Availability• No significant vs. insignificant analysis needed• No requirement that the plan have a

determination letter or practices and procedures• Only way to correct “egregious” errors

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VCP Filing• Don’t try this at home! Talk to your attorney• Emphasize new procedures to prevent this from

happening again• “John Doe” filing is available

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Audit CAP Overview• IRS audits the plan, and finds the error• IRS negotiates a (potentially expensive) sanction• Disqualification is always an option

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General Correction Principles• Restore the plan to where it would have been

had no error occurred• Correction should resemble one provided for in

the Code• Correction should keep assets in the plan• Corrections providing benefits to Non-High

Employees are preferred

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General Correction Principles (continued)

• Correction method should not violate a different provision of the Code

• Correction method should be applied consistently

• Corrective contributions count against contribution or deferral limits in year of error—NOT current year

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General Correction Principles (continued)

• Corrective contributions MUST be adjusted for earnings, but MAY be adjusted for losses

• Always document how the error will be avoided in the future

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Exceptions to Full Correction• Corrective distribution not required if under

lesser of $75 or cost of payment• Rule applies to corrective distributions, not

contributions• Overpayments of $100 or less need not be

corrected

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Exceptions to Full Correction (continued)

• Corrections need not be made for a lost participant, after reasonable attempts to find the individual

• Excess contributions of $100 or less need not be distributed or forfeited

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Future EnhancementsIRS has requested comments on how to correct:• Failure to deliver safe harbor notice• Failure to implement auto-enroll or auto-

escalation• Failure to properly classify a Roth deferral

election

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Changes to EPCRS• Missed matching contributions can be made as

a match, not a QNEC (i.e., subject to vesting)• Missed elective deferrals must still be made as a

QNEC

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Changes to EPCRS (continued)

• Generally, plan must be made whole for unrecouped overpayments

• Plan need not be made whole for overpayment due solely to a premature distribution

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Changes to EPCRS (continued)

• Certain steps must be taken to find any lost participants impacted by a correction

• Use the IRS Letter Forwarding Program is no longer required

• Because it no longer exists

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Changes to EPCRS (continued)

• Corrective allocations can come from forfeitures IF plan document allows forfeitures to reduce nonelective contribution

• Exception—ADP or ACP failures require an employer contribution, and cannot be paid from forfeitures

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Changes to EPCRS (continued)

• 403(b) Plans generally can correct a failure in the same manner as a qualified plan

• EPCRS can be used to correct 403(b) plan document failures for the first time

• However, pre-2009 403(b) failures must be corrected under the 2008 EPCRS

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Questions?

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