New IRS Guidance Expands Retirement Plan Self-Correction Program

The IRS released an updated version of the Employee Plans Compliance Resolution System (EPCRS) in Revenue Procedure 2019-19 on April 19, 2019. The revised system expands the availability of self-correction options for correcting certain plan failures in three primary areas: plan document failures, operational failures, and loan failures. The IRS anticipates that this expanded guidance will increase plan compliance and reduce the costs and burdens associated with maintaining plan compliance.

Plan Document Failures
The revised procedure allows for the self-correction of certain plan document failures, other than the initial failure to adopt a qualified plan or 403(b) plan document timely, as long as the plan has a favorable letter at the time of correction. The EPCRS generally considers plan document failures as “significant” failures, meaning the failure would need to be corrected by the end of the second plan year following the year the failure occurred to qualify for self-correction.

Operational Failures
The EPCRS now allows for the self-correction of operational failures by retroactive plan amendment when a plan sponsor fails to follow the terms of its plan document. This allows a plan sponsor to conform the terms of the plan document to the prior operations. Self-correcting these operational failures by retroactive amendment can occur if these three conditions are met.

  1. The plan amendment would result in an increase of a benefit, right, or feature.
  2. The increase in the benefit, right, or feature is available to all eligible employees.
  3. Providing the increase in the benefit, right, or feature is permitted under the Internal Revenue Code and satisfies the EPCRS general correction principles.

Loan Failures
The EPCRS allows a defaulted loan to be self-corrected by either the participant making a lump-sum payment, re-amortizing the outstanding balance of the loan, or some combination of the two options. Previously these options were only available when filing through the voluntary correction program (VCP). The revised procedure also allows for a deemed loan to be reported on Form 1099-R in the year of correction through the self-correction program (SCP).

Additionally, EPCRS now provides for the self-correction of a plan loan failure where spousal consent was not obtained (if the plan required it), by obtaining spousal consent after the fact.

The revised procedure now allows for the self-correction of a plan exceeding its document-specified number of loans outstanding. Plan sponsors can retroactively amend their plans to increase the number of loans allowed under the plan document.

While the EPCRS has greatly expanded the availability of self-correction for loan failures, some restrictions do apply. Revenue Procedure 2019-19 states that in order to receive a no-action letter through the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP), loan default failures would still need to be corrected under VCP. Finally, loan failures arising from loans that exceed the statutory loan limits—those that exceed the maximum period or that were not subject to level amortization—do not qualify for self-correction.