The Employee Plans Compliance Resolution System (“EPCRS”) is a set of three correction programs under which retirement plans sponsors may correct errors that jeopardize a plan’s tax-favored status. These programs—the Self-Correction Program (“SCP”), the Voluntary Correction Program (“VCP”), and the Audit Closing Agreement Program (“Audit CAP”)—are intended to be updated on a regular basis. Although the latest EPCRS update has been a long time in the making (the previous version was issued in 2008), the wait is now over; the IRS has just released Revenue Procedure 2013-12, which substantially updates and revises EPCRS.
Perhaps the biggest news about the new Revenue Procedure is that it comprehensively addresses correction methods for Code Section 403(b) plans. We address those 403(b) aspects in a separate article. This article briefly summarizes several of the more significant changes applicable to plans that are intended to qualify under Code Section 401(a).
The provisions of the new Revenue Procedure are effective as of April 1, 2013. However, plan sponsors and administrators may rely on them immediately.
Changes Applicable to All Plans
New VCP Forms. Revenue Procedure 2013-12 introduces two new forms that must be accompany any VCP submission filed on or after April 1, 2013.
● Form 8950 is the new VCP application itself. It includes a recommended
“procedural checklist.” This checklist replaces the lengthy (and mandatory)
Appendix C checklist that is familiar to anyone who has ever assembled a
● Form 8951 is a worksheet on while filers must compute the applicable VCP
New Address for Submitting Applications. Applications under the new Revenue Procedure must be submitted to the IRS Service Center in Covington, Kentucky, rather than the Washington, D.C. office. This change (together with the new Forms) is intended to reduce the time required for initial screening and assignment of applications.
New Rules for Locating “Lost Participants. EPCRS has long required sponsors to take “reasonable actions” to locate missing participants and beneficiaries to whom additional benefits are due. The principal means of satisfying this requirement has been the IRS’s letter-forwarding service. Last year, however, the IRS discontinued that service (a move that required revisions to many pending VCP submissions).
Revenue Procedure 2013-12 provides several methods for satisfying this requirement. These include mailing a certified letter to the individual’s last known address. Alternatively, a plan sponsor or administrator may use the Social Security Administration’s letter-forwarding program, a commercial locater service, a credit reporting agency, or Internet search tools.
Revised Procedures for Streamlined VCP Submissions. The previous version of EPCRS (Revenue Procedure 2008-50) introduced a number of “streamlined” correction procedures. These were set forth in Appendix F and its many Schedules. Each of the Schedules consisted of a fill-in-the-blank VCP correction for a common plan failure. The IRS has combined substantially revised versions of these (often confusing) Schedules, along with the generic streamlined submission (formerly Appendix D), into a new, two-part Appendix C.
Revised VCP Compliance Fees. Although the general method for determining VCP compliance fees (a sliding scale based on the number of participants in the plan) has not changed, new provisions have been added with respect to 403(b) plans, multiple-employer plans, multiemployer plans, and preapproved plans. Newly reduced fees are also available for plans with multiple failures and certain nonamender failures corrected under the new streamlined procedures in Appendix C.
Clarified Rules for Combined Determination-Letter and VCP Filings. The IRS has substantially revised the provisions of EPCRS that explain when a determination-letter may, may not, or must be filed along with a VCP submission.
Anonymous VCP Submissions. Under the new Revenue Procedure, an individual representing the plan sponsor in an anonymous VCP submission must satisfy the power-of-attorney requirements, must include a statement to that effect in the submission under penalty of perjury, and must provide a Form 2848 (Power of Attorney) if and when the sponsor’s identity is revealed to the IRS.
Changes Applicable to Defined Contribution Plans
Correction of Missed Matching Contributions. EPCRS has long included safe-harbor methods for correcting an administrator’s failure to permit eligible employees to make elective deferrals or after-tax contributions to the plan. Those methods require corrective allocations to the accounts of affected individuals. Such allocations must be made in the form of fully vested “qualified non-elective contributions” (or “QNECs”). Revenue Procedure 2013-12 makes clear, however, that this is not the case when correcting a missed matching contribution. Such an allocation may, instead, be subjected to the plan’s normal vesting schedule.
Allocations to Correct ADP/ACP Failures Must Be “Real” QNECs. Allocations made to correct nondiscrimination testing failures must also be made in the form of fully vested QNECs. For years, benefits professionals had debated whether such QNECs could be made by allocating amounts held in the plan’s forfeiture account. In Revenue Procedure 2013-12, the IRS confirms that reallocated forfeitures may not be used to correct ADP/ACP failures. This is because, pursuant to the regulatory definition of a QNEC, such contributions must enter the plan on a fully vested basis. Forfeitures, by definition, arise from amounts that were not fully vested when they entered the plan. Thus, any correction that requires a QNEC must be made with fully vested contributions to the plan.
No De Minimis Rule for Corrective Allocations. EPCRS has long included a de minimis rule under which corrective distributions of $75 or less may be omitted if the amount of the distribution is less than the amount reasonably necessary to process and deliver it. Revenue Procedure 2013-12 emphasizes that this de minimis rule does not apply to corrective allocations. Thus, if full correction requires a corrective allocation for a participant with an account under the plan, the allocation must be made, regardless of how small it is.
Correcting Section 415 Failures Under SCP. The new Revenue Procedure creates an exception to the general rule that sponsors who correct under SCP must have “established practices” in place to avoid repeated violations. Under this exception, even a plan that regularly accepts annual additions in excess of the Code Section 415 limit (currently, the lesser of 100% of the participant’s compensation or $51,000) may correct such violations under SCP. This exception applies, however, only if the plan (i) does not provide for matching contributions, and (ii) refunds any excess annual additions within two and a half months after the close of each limitation year.
Changes Applicable to Defined Benefit Plans
Adjusting Distributions for Late Payment. The new version of EPCRS reiterates the IRS’s position that corrective distributions from defined benefit plans must be adjusted in a manner consistent with the plan’s actuarial assumptions for adjusting optional payment forms. Revenue Procedure 2013-12 also expands and clarifies this rule in two important respects.
First, it makes clear that such adjustments are also subject to both the minimum present-value rules in Code Section 417(e) and the maximum value rules in Section 415. Thus, if the form of payment that should have been made is subject to the Section 417(e)(3) present-value rules, the corrected payment must be adjusted using the same 417(e) factors that were in effect when the distribution should have been made. Similarly, the benefit limits under Code Section 415 in effect on the date the benefit should have been distributed must be taken into account in adjusting any such delayed payment.
Second, the Revenue Procedure explains that the application of these rules depends on the payment that should have been made, and not the corrective payment. For example, although a lump-sum payment is normally subject to the 417(e)(3) present-value rules, a lump-sum make-up payment that corrects missed annuity payments is not subject to these 417(e)(3) rules.
Violations of PPA’s Funding-Based Benefit Restrictions. The new version of EPCRS also tackles a plan’s failure to comply with the funding-based benefit restrictions under Code Section 436. This complex regime of restrictions was introduced by the Pension Protection Act of 2006 (“PPA”), but was not addressed in the 2008 version of EPCRS. Substantial new provisions in the Revenue Procedure address potential failures to implement these new requirements.
What Does This Mean for Plan Sponsors?
Qualified retirement plans are enormously complex to administer, and errors are almost inevitable. Fortunately, the vast majority of such errors can be corrected—without an IRS filing and without paying a compliance fee—under SCP. The remainder can be corrected under VCP, in return for a compliance fee that is a small fraction of the cost of an Audit CAP sanction. And even when an error is discovered by the IRS on audit, a negotiated sanction under Audit CAP is a tiny percentage of the additional tax liability that would arise from plan disqualification.
We encourage sponsors to think of EPCRS as an oil change for your retirement plan. Properly and regularly used, it eliminates the inevitable friction between the terms of a qualified plan and the lives of the human beings who administer and participate in it. It is an invaluable toolkit for reducing the exposure faced by sponsors and administrators of such plans.
With each new update, EPCRS adds more opportunities and correction tools, but it also becomes more complex and detailed. Spencer Fane’s Employee Benefits Group has decades of experience with both the EPCRS correction methodologies and the IRS negotiations required under VCP and Audit CAP. Contact any member of our Group for information on how we can put the new EPCRS to work for you.