If you are a plan sponsor it is important for you to know that there are some new regulations regarding the Internal Revenue Service (IRS) corrections programs. For those of you who may be in a situation where your plan has not met, or will not meet, IRS requirements for a period of time, there is a system designed to allow you to make the necessary corrections to remain in compliance.
The Employee Plans Compliance Resolution System (EPCRS)
Under EPCRS, plan sponsors are given the opportunity to correct any compliance failures in the organization’s Employee Benefit Plan so that they can continue without disruption, enabling them to provide employees with retirement benefits on a tax-favored basis. For those companies that want to leverage the system, there are several general principles to consider. Here is a sample of some of the more common suggestions and observations regarding failures and compliance:
- Plan administrators and sponsors should have procedures and practices in place to ensure that their plans are in accordance with the applicable requirements of the IRS Code
- Plan administrators and sponsors should make voluntary and timely corrections to any failures in the plan
- Sanctions for plan failures should be reasonable, taking into consideration the nature, extent and severity of the violation
Three Programs in the System
Under EPCRS there are three programs that plan sponsors and administrators can use to correct plan documentation or operational errors that may occur.
- The Self-Correction Program (SCP)
At any time, a plan sponsor that has established compliance practices and procedures may, without paying any fee or sanction, correct insignificant operational failures under a Qualified Plan, a 403 (b) Plan, a SEP, or a SIMPLE IRA Plan. Generally, if the correction is made within a specific time as specified in section 9.02, the plan sponsor may correct even significant operational failures without payment of any fee or sanction. - The Voluntary Correction Program (VCP)
At any time before an audit, the plan sponsor may elect to pay a limited fee and receive the IRS’s approval for correction of a failure in a Qualified Plan, 403 (b) Plan, SEP or SIMPLE IRA Plan. - Audit Closing Agreement Program(AUDIT CAP)
If a failure in the plan, other than one that has already been corrected through SCP or VCP, is identified during an audit of the plan, the plan sponsor may correct the failure and pay a sanction that bears a reasonable relationship to the extent, nature and severity of the failure, taking into account the extent to which the correction occurred before audit.
Key Changes and New Guidelines
There are several key points at the core of the modifications that were released by the IRS in September 2016. The new guidelines under the EPCRS include the following:
- Changes in the determination letter program
As of January 2017, (a) the staggered five year remedial amendment cycles for individually designed plans will be eliminated and (b) the scope of the determination letter program for individually designed plans will be limited to initial plan qualification and qualification upon plan termination as well as certain other circumstances.
Under the old guidelines, applications for corrections also often required submission of a determination letter application at the same time and for self-correction of significant the plan needed to have a current determination letter. Under the new guidelines, determination letter applications are no longer required when applying for correction under EPCRS and self-correction for significant errors is available as long as the plan has a determination letter, but it need not be current.
- Changes to Audit CAP
If significant plan errors are uncovered during audit or examination (in this situation, the plan sponsor has not voluntarily sought correction before the IRS identified the error during an audit), the plan sponsor is entitled to use the Audit CAP. Going forward, sanctions under Audit CAP will be determined based on the facts and circumstances, including the relevant factors, such as the maximum payment amount, which are described in section 14.02. In addition, the sanction for failing to timely adopt an amendment that is corrected within three months after the expiration of the remedial amendment period has been reduced to $750 regardless of the number of plan participants.
- User fees
In a departure from previous years, beginning in 2017 all user fees and rules relating to user fees for VCP submissions will be published annually by the IRS in the EP revenue procedure that sets forth user fees and VCP user fees.
- Anonymous VCP fees
Under the VCP plan, sponsors are able to submit a plan to the IRS anonymously and receive conditional approval of a proposed correction prior to identifying the plan and plan sponsor. However, if the IRS does not give approval, the plan sponsor may withdraw the application but must forfeit the full filing fee. Previously, the IRS would refund 50% of the filing fee when an anonymous application was withdrawn for lack of approval.
Please note that the 2016 EPCRS guidelines were released to ensure coordination with recent changes to the IRS determination letter program. If you have any questions about the new determination letter program or changes to the Employee Plans Compliance Resolution System, please call Liz Harper at 973-994-9494 or email Liz at elizabeth.harper@sobelcollc.com.
