IRS Releases New Employee Plans Compliance Resolution System (EPCRS)

Practical Law Legal Update 0-523-3872 (Approx. 6 pages)

IRS Releases New Employee Plans Compliance Resolution System (EPCRS)

by PLC Employee Benefits & Executive Compensation

Voluntary Compliance Program (VCP) Changes

Revenue Procedure 2013-12 made several changes to the IRS's Voluntary Compliance Program (VCP) that impact any plan sponsor intending to submit a VCP submission on or after April 1, 2013.

VCP allows a plan sponsor to correct a qualification failure by voluntarily seeking IRS approval (see VCP Submission Procedures) and paying a limited compliance fee (see VCP Fees). Both the submission procedures and the fees relating to VCP submissions were altered by the new EPCRS.

EPCRS also made several changes that impact plan sponsors submitting VCP applications for IRC Section 403(b) plans, including permitting submissions for correcting a failure to timely adopt an IRC Section 403(b) plan.

VCP Submission Procedures

The most significant change to the VCP submission procedures is that all VCP submissions made on or after April 1, 2013 are required to include a completed Form 8950 (incorporating VCP application information) and Form 8951 (with VCP compliance fee information). Much of the information requested for VCP submissions under the old EPCRS is now incorporated into the Form 8950 and duplicative items captured by Form 8950 are eliminated from the new EPCRS. These forms are currently available only in draft form and may not be used until the IRS issues the final forms (see Draft Form 8950 and Draft Form 8951).

Additional changes to the VCP submission procedure include:

Model VCP submission documents: Appendix C. Appendix C is revised to include:
- a new model compliance statement providing a standardized framework that plan sponsors should (but are not required to) include in their VCP submission; and
- schedules (formerly Appendix F schedules) that set out standardized descriptions of common qualification failures and correction methods. The IRS clarified that a schedule including a standardized correction method may only be used if its printed content applies without modification to the applicant's situation.
Restated plans as evidence of correction. The IRS clarified that if a restated plan is submitted as evidence of a correction made pursuant to VCP, the plan sponsor must identify the page, section and the specific plan language that resolves each specified qualification failure in the VCP submission.
Anonymous submissions. If a VCP submission is made anonymously, the individual submitting the VCP application must satisfy the power of attorney requirements of EPCRS Section 11.07.

VCP Fees

EPCRS changed the VCP compliance fees to provide the following:

Electronic fund transfers. The IRS may convert compliance checks into electronic fund transfers by using the account information on the check rather than processing the actual check. Plan sponsors should ensure that sufficient amounts exist in the account prior to sending the compliance check.
Temporarily reduced fees for 403(b) plans. The VCP compliance fee for a failure to adopt a IRC Section 403(b) plan is temporarily reduced by 50% if:
- the only failure included in the submission is the failure to adopt the plan; and
- the submission is made within one year of the date Revenue Procedure 2013-12 is published. (On January 2nd, 2013, the IRS provided the Revenue Procedure 2013-12 in the Advance Federal Register.)
$500 compliance fee for nonamenders. The VCP compliance fee is $500 if the sole failure is the failure to adopt a required amendment within the remedial amendment period, provided that the amendment is adopted within three months of the end of that remedial amendment period.
Fees for multiple failures. If multiple failures are included in one VCP submission and each failure is subject to a reduced fee, the plan sponsor is required to pay the lesser of the sum of the reduced fees or the fee provided under EPCRS Section 12.02(1) (which did not change from the last EPCRS).
Reduced fees for nonamender failures discovered during the determination letter process. EPCRS provides reduced sanctions and otherwise updates the fee schedule for nonamender failures discovered during the determination letter application process (that are unrelated to failures submitted through VCP).

IRC Section 436 Failures

EPCRS adds correction procedures for operational failures under IRC Section 436(b), (c) or (e) which generally require the plan sponsor to make a contribution to the plan equal to the amount required under IRC Section 436(b)(2), (c)(2), or (e)(2) (as applicable).

The procedure also provides that corrective distributions from a plan subject to a benefit restriction under IRC Section 436 are not subject to the requirements of IRC Section 436 at the time of the correction. However, if that corrective distribution is made in the form of a prohibited payment under IRC Section 436 (such as a single-sum payment), the plan sponsor is required to make an additional corrective contribution to the plan in the amount of that corrective distribution.

Locating Lost Participants

EPCRS revises the required correction procedures for locating lost participants to reflect the fact that the IRS letter forwarding program is not available after August 31, 2012. It revises the reasonable actions that a plan sponsor must take to locate lost plan participants who are owed additional benefits to require both of the following:

A mailing to the individual's last known address using certified mail.
One or more additional search methods, such as the Social Security letter forwarding program, a commercial locator service or credit reporting agency.

It also provides a very limited extension of the correction period for plan sponsors currently in the process of correcting failures through VCP (or within 150 days of the expiration of the correction period for SCP) who are taking action to locate lost participants.

Determination Letter Applications No Longer Permitted with Certain VCP Submissions

The IRS provides that determination letter applications are no longer required or permitted to be submitted with a plan sponsor's VCP submission for:

Failures to adopt timely good faith, interim or optional law change amendments which are corrected by the plan sponsor by adopting corrective amendments before the plan's first on-cycle year following the date by which the amendment should have otherwise been adopted. (The new EPCRS also provides definitions for good faith, interim and optional law change amendments.)
Operational failures corrected through a plan amendment under VCP during an off-cycle year.
Failures to adopt amendments required under the terms of a favorable determination letter within the applicable remedial amendment period specified in the determination letter.

Corrective Amendments for Pre-approved Plans

The adoption of a plan provision not provided for in a pre-approved plan's adoption agreement that would otherwise result in the plan sponsor losing reliance on the plan's opinion or advisory letter will not cause the plan sponsor to lose such reliance if:

The corrective amendment adopting that provision would otherwise be permitted under the rules for pre-approved plans.
No other modification has been made to the plan that would cause the plan sponsor to lose its reliance on the opinion or advisory letter.

Corrective Contributions for Missed Deferral Opportunities

EPCRS now provides that a plan sponsor may correct a failure to make a matching contribution to a participant due to the participant's improper exclusion from the plan by making a non-elective contribution to the plan in the form of a corrective matching contribution (subject to the vesting schedule for matching contributions) rather than in the form of a qualified non-elective contribution (QNEC). (QNECs must still be made to the plan to correct the participant's "missed deferral opportunity" to make elective deferrals to the plan.)

The EPCRS also provides additional methods for correcting the improper exclusion of employees:

From safe harbor IRC Section 401(k) plans (see Practice Note, Safe Harbor 401(k) Plans: Overview and Planning Opportunities).
From IRC Section 403(b) plans and SIMPLE IRA plans.

There are many other technical changes to the new EPCRS which may assist plan sponsors in correcting qualification failures in their plans. The changes summarized in this legal update, as well as many other changes, will be incorporated into PLC's Practice Note, Correcting Qualified Plan Errors under EPCRS and Correcting Plan Errors under EPCRS Checklist.

IRS Releases New Employee Plans Compliance Resolution System (EPCRS) | Practical Law