On August 14, 2008, the Internal Revenue Service (“IRS”) issued a new and improved version of its Employee Plans Compliance Resolution System (“EPCRS”) which is the vehicle used by qualified retirement plan sponsors to voluntarily correct plan failures.
The EPCRS has three programs 1) the Self-Correction Program (SCP) for the correction of operational failures without fee or IRS approval, 2) the Voluntary Correction Program (VCP) for the correction of more significant failures with IRS approval and a limited fee and 3) the Audit Closing Agreement Program (Audit CAP) for the correction of failures identified during an IRS audit.
Revenue Procedure 2008-50 makes several significant changes to the EPCRS program and is effective January 1, 2009; plan sponsors, however, are permitted to rely on the new program as of September 2, 2008. The following summarizes some of the main changes to the EPCRS program:
- More time. The IRS has made it easier for a plan sponsor to be considered substantially completed with a self-correction when the plan or plan sponsor is under an IRS examination.
- Correction by plan amendment. The new EPCRS program clarifies when plan amendments can be used under SCP to correct for operational failures, now requiring that any corrections prior to a plan amendment be compliant with EPCRS.
- Deferral errors. The new EPCRS program gives examples of how to correct for failing to implement a participant’s deferral election.
- More correction methods. The new EPCRS program expands the correction methods for elective deferrals to include corrections for catch-up contributions and after-tax or designated Roth contributions.
- Plan loans. The new EPCRS program reduces the filing fees associated with correcting certain plan loan violations while expanding the actual ability of plan sponsors to use VCP to correct plan loan violations.
- Penalty taxes. The new EPCRS provides participants with relief from the 10% additional income tax imposed by § 72(t) on early distributions and various otherwise applicable excise taxes.
- § 415 corrections. The new EPCRS program gives specific rules on how to correct a failure to limit annual additions in a defined contribution plan as required by § 415.
- Earnings. The IRS clarifies that the earnings rate computed by using the Department of Labor's VFCP Online Calculator may be used to calculate any earnings required to be added to corrective contributions, distributions, allocations, and reallocations if it is not feasible to make a reasonable estimate of what the actual investment earnings would have been.
- Streamlined procedures. The VCP’s streamlined procedure which allows for reduced fees and a streamlined application process has been expanded from covering only three types of failures to now covering nine types of failures.
- Samples. The IRS has provided sample application forms for all VCP applications including a standardize application form for the streamlined VCP procedures.
- Reasonable and Appropriate. The IRS has expanded the factors used in determining if a correction is “Reasonable and Appropriate” to include correction methods approved by other governmental agencies (such as the Department of Labor) for correcting similar failures.
- Also, the new program clarifies that the IRS may prohibit the use of one or more correction programs under EPCRS in particular cases in the interest of sound tax administration.
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