IRS Revenue Procedure 2016-51 Updates EPCRS to Consolidate Prior Guidance and Incorporate Changes to Determination Letter Program | Practical Law

IRS Revenue Procedure 2016-51 Updates EPCRS to Consolidate Prior Guidance and Incorporate Changes to Determination Letter Program | Practical Law

The Internal Revenue Service (IRS) issued Revenue Procedure 2016-51, which modifies the Employee Plans Compliance Resolution System (EPCRS) to account for the changes made to the determination letter application program under Revenue Procedure 2016-37 and makes several other important changes relating to user fees and sanctions imposed under EPCRS. Revenue Procedure 2016-51 also incorporates modifications to EPCRS from Revenue Procedures 2015-27, 2015-28, and 2016-8.

IRS Revenue Procedure 2016-51 Updates EPCRS to Consolidate Prior Guidance and Incorporate Changes to Determination Letter Program

by Practical Law Employee Benefits & Executive Compensation
Published on 05 Oct 2016 • USA (National/Federal)
The Internal Revenue Service (IRS) issued Revenue Procedure 2016-51, which modifies the Employee Plans Compliance Resolution System (EPCRS) to account for the changes made to the determination letter application program under Revenue Procedure 2016-37 and makes several other important changes relating to user fees and sanctions imposed under EPCRS. Revenue Procedure 2016-51 also incorporates modifications to EPCRS from Revenue Procedures 2015-27, 2015-28, and 2016-8.
On September 29, 2016, the IRS issued Revenue Procedure 2016-51 (Rev. Proc. 2016-51), a consolidated statement of the correction programs under the IRS' Employee Plans Compliance Resolution System (EPCRS). Rev. Proc. 2016-51 modifies and supersedes Rev. Proc. 2013-12, which is the prior consolidated statement of EPCRS programs. The updated EPCRS notably eliminates references to determination letter application requirements in light of Rev. Proc. 2016-37, which changed the determination letter program by terminating the five-year remedial amendment cycles for individually designed qualified plans (see Legal Update, IRS Provides Determination Letter Guidance in Revenue Procedure 2016-37 and Expert Q&A on the Impact of Downsizing the IRS Determination Letter Program).
Rev. Proc. 2016-37 updates EPCRS to consolidate previous EPCRS guidance, including:
Rev. Proc. 2016-37 also:
  • Clarifies that any correction method set out in the EPCRS can be used to correct a failure, so long as the plan and the plan sponsor are eligible for the correction used.
  • Removes the user fee schedule from EPCRS, instead providing that the IRS will set out the EPCRS user fees, including Voluntary Correction Program (VCP) user fees, as part of an annually published list.
  • Clarifies that Audit Closing Agreement Program (Audit CAP) sanctions will be based on facts and circumstances but generally not be less than the VCP user fee.
  • Provides that the IRS reserves the right to impose sanctions for VCP submissions in excess of the VCP user fee for egregious failures,.
  • Provides that compliance statements (issued after a VCP) and closing agreements (issued after an Audit CAP) do not constitute determinations that a plan is qualified in document or operation, but only that the plan has been timely adopted or that the specific operational failure has been corrected.
  • Eliminates the Appendix C model form for a VCP submission. Beginning January 1, 2017, the IRS will only provide model VCP forms through its website.
  • Removes outdated references (such as references to the use of the Social Security letter forwarding program for locating missing participants and beneficiaries).

EPCRS

EPCRS was established by the IRS to help sponsors of qualified retirement plans to correct errors that could adversely affect the qualification of a plan (qualification failures). There are three programs within EPCRS that allow plan sponsors to correct errors:
  • Self-Correction Program (SCP). This program allows an eligible plan sponsor to correct certain operational failures without any IRS involvement.
  • VCP. This program allows the plan sponsor to correct qualification failures.
  • Audit CAP. This program allows the plan sponsor to correct qualification failures found during an IRS examination that have not been previously corrected under SCP or VCP.
For more information on EPCRS, see Practice Notes, Correcting Qualified Plan Errors under EPCRS and Common Qualification Errors and Corrections under EPCRS, and Correcting Plan Errors under EPCRS Checklist.
The last comprehensive update to EPCRS was made in Rev. Proc. 2013-12 (see Legal Updates, IRS Releases New Employee Plans Compliance Resolution System (EPCRS) and Taking Advantage of the Updated EPCRS).

Revenue Procedure 2016-51: Changes to EPCRS

Rev. Proc. 2016-51 provides an overview of EPCRS. It includes two appendices that provide guidelines and examples of operational failures, permissible correction methods, and methods of determining earnings adjustments that should be reflected in corrective allocations and distributions.
Rev. Proc. 2016-51 also reflects numerous changes to EPCRS.

Determination Letter Application Program

Rev. Proc. 2016-51 modifies EPCRS to account for the changes to the determination letter program made by Rev. Proc. 2016-37, including the termination of the five-year remedial amendment cycles for individually designed qualified plans (for more information on Rev. Proc. 2016-37, see Legal Update, IRS Provides Determination Letter Guidance in Revenue Procedure 2016-37).
Rev. Proc. 2016-51 reflects these changes by:
  • Deleting several provisions of Rev. Proc. 2013-12, including:
    • Section 4.10 (relating to the submission of a determination letter) and replacing it with a new Section 4.10 relating to egregious failures to set out the effect of egregious failures on the EPCRS;
    • rules requiring the submission of a determination letter application when correcting by plan amendment under the SCP (this was previously in Section 9.03);
    • the requirement to file a determination letter application with a VCP submission and the related user fee for that application (these provisions were previously in Sections 11.04(3) and 11.05);
    • the procedure for filing a determination letter application as part of the VCP submission (this was previously in Section 10.05); and
    • procedures in Sections 11.14(1), 11.14(2)8 and 11.14(2)10 for including a determination letter application with a VCP submission.
  • Revising the definition of Favorable Letter in Section 5.01(4) to provide that a favorable letter for an individually designed plan is simply a determination letter that has been issued for the plan (and therefore not necessarily a current letter).
  • Revising Section 6.05 to:
    • provide that a determination letter application may no longer be submitted with a VCP submission; and
    • clarify that a compliance statement or closing agreement issued by the IRS does not constitute a determination that the amendment meets the qualification requirements.
  • Adding several provisions to EPCRS, including:
    • Section 10.07(2)(b), to clarify that a compliance statement issued for a VCP submission to correct a nonamender failure is not a determination as to whether the corrective plan amendment as drafted complies with the qualification requirements or conforms with the plan's prior operation; and
    • Section 10.07(2)(c), to clarify that a compliance statement issued for a VCP submission to correct an operational failure constitutes a determination that the Operational Failure has been corrected, but is not a determination that the terms of the plan, including the corrective plan amendment, satisfy the qualification requirements.
  • Revising renumbered Section 10.09 (formerly section 10.10) to reflect that a determination letter should not be requested in an anonymous submission.
  • Revising the wording of Section 5.01(2)(b) to reflect Rev. Proc. 2016-37 by eliminating the reference to Rev. Proc. 2007-44.

Rev. Proc. 2015-27 (Overpayment Failures)

Rev. Proc. 2015-27 clarified the available correction methods for overpayment failures (for more information, see Legal Update, IRS Revenue Procedure 2015-27 Modifies EPCRS). Rev. Proc. 2016-51 incorporates these clarifications into EPCRS by:
  • Including a new Section 4.04 which extends the period that a plan sponsor can correct excess annual additions and remain eligible for the SCP to nine and a half months.
  • Revising Section 6.02(5)(d) to delete the reference to the Social Security letter forwarding program.
  • Revising Sections 6.06(3) and 6.06(4) to give plans flexibility when correcting an overpayment. Depending on the circumstances, plans are not always required to demand recoupment of large overpayments from participants and beneficiaries. Plans have flexibility when correcting an overpayment and appropriate correction methods include:
    • having the employer or another person contribute the amount of the overpayment (plus interest) to the plan; and
    • adopting a retroactive amendment conforming the plan document to the plan's operations.
  • Revising Section 11.02 to provide that applicants may use model VCP submission documents by submitting Form 14568 (the Model VCP Compliance Statement) and Forms 14568-A through 14568-I. Section 11.02(4) now links to the IRS website for the most current version of these forms. Section 11.14(2)5 now refers to these forms.
  • Deleting Appendices C and D, which appeared in Rev. Proc. 2013-12.

Rev. Proc. 2015-28 (Safe Harbor Correction Methods)

Rev. Proc. 2015-28 created:
  • A new safe harbor correction method relating to automatic contribution features in Code Section 401(k) plans and 403(b) plans.
  • Special safe harbor correction methods for plans with employee elective deferral failures (EEDFs) of limited duration.
(For more information on Rev. Proc. 2015-28, see Legal Update, IRS Revenue Procedure 2015-28 Adds New Safe Harbor Correction Methods to EPCRS.)
The IRS modified EPCRS for the changes made in Rev. Proc. 2015-28 by revising Appendix A of Rev. Proc. 2013-12. As a result, Appendix A of Rev. Proc. 2016-51 includes:
  • A new Section .05(8) that includes the new safe harbor correction method for certain EEDFs associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in Code Section 401(k) plans and 403(b) plans (including employees who made affirmative elections that were not correctly implemented). For more information on these safe harbors, see Practice Note, Correcting Qualified Plan Errors under EPCRS: Safe Harbors for Employee Elective Deferral Failures (EEDFs).
  • A new Section .05(9) that provides two safe harbor correction methods for certain EEDFs of limited duration, including one safe harbor for failures that do not exceed three months and a second safe harbor for failures that exceed three months but do not extend beyond the SCP correction period for significant failures. The term "corrective contributions" was changed to "corrective allocations" to reflect Section 6.02(4) of Rev. Proc. 2016-51.
  • A new Section .05(10) that includes a definition of EEDFs.

User Fees

Rev. Proc. 2016-8 updated the IRS user fee program by adding a new user fee, decreasing numerous fees, and sharply increasing other fees. Rev. Proc. 2016-8 includes a revised user fee schedule for VCP submissions under EPCRS, reducing the number of categories and decreasing the fees for VCP submissions under EPCRS. For more information, see Legal Update, IRS Provides Guidance on the Determination Letter Program in Notice 2016-03 and Revenue Procedures 2016-6 and 2016-8.
Starting in 2017, all user fees and rules relating to user fees for VCP submissions will be published in the annual revenue procedure on user fees. Therefore, the IRS deleted most of Section 12 of Rev. Proc. 2013-12, which set forth user fees for VCP submissions. Sections 10.01 and 11.06 reflect that change.
Rev. Proc. 2016-51 also includes the following changes:
  • Section 4.08 now provides that the user fee for a terminating orphan plan may be waived at the discretion of the IRS and the request for a waiver should be made at the time of the submission.
  • Section 4.10 states that the IRS reserves the right to impose a sanction that is larger than the VCP user fee.
  • Section 6.11(5)(b) clarifies that a sanction, in addition to the user fee, equal to 10% of the excess amount will apply when a failure involves an excess amount under a SEP or a SIMPLE IRA and the plan sponsor retains the excess amount in the SEP or SIMPLE IRA Plan.

Other Changes to EPCRS

Rev. Proc. 2016-51 also changes the approach for determining Audit CAP sanctions. Under the revised Section 14.01, the Audit CAP sanction will not be a negotiated percentage of the maximum payment amount, but instead will be determined based on the facts and circumstances, including the relevant factors described in Section 14.02. In general, the sanction will not be less than the VCP user fee applicable to the plan. Under Section 14.04(3), 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.
Rev. Proc. 2016-51 also makes changes to:
  • Appendix A, Section .01(2), providing that plan sponsors may choose any correction method in the appendices to correct a failure.
  • Section 11.11, providing that an applicant that wants acknowledgement of a VCP submission must use IRS Letter 6265 and attach it to the VCP submission.
  • Section 10.06(9), clarifying that the correction of interim amendment and nonamender failures must be made by the date of submission. Corrective plan amendments must be adopted no later than 150 days after the date of the compliance statement.
  • Citations and cross references.

Public Comments

Rev. Proc. 2016-51 explains that the IRS and Treasury Department will continue to update EPCRS, including improvements based on comments received. Members of the public may submit comments on Rev. Proc. 2016-51 to the addresses provided in Section 17.

Practical Implications

Rev. Proc. 2016-51 is effective January 1, 2017. Rev. Procs. 2013-12, 2015-27, and 2015-28 are modified and superseded.
Sponsors of qualified retirement plans should familiarize themselves with the changes to EPCRS. Numerous changes from several years of guidance have been incorporated into Rev. Proc. 2016-51. It also makes important changes to the fees and sanctions associated with the correction programs available to plan sponsors under EPCRS that may impact a plan sponsor's decision as to what correction program is best to use in a particular circumstance.