Need a Do-Over? IRS Expands and Updates Qualified Plans Correction Guidance

INCREASED PLAN SPONSOR FLEXIBILITY FOR CORRECTION OF OVERPAYMENTS

One of the most vexing problems for plan sponsors is how to recoup or correct for overpayments to participants and beneficiaries. In recent years, the IRS has given plan sponsors more flexibility for the correction of overpayments, moving away from the broad requirement that plan sponsors must always seek to recoup repayments from participants and beneficiaries. In the new EPCRS, the IRS further expands plan sponsor options with respect to overpayments as follows:

• The “de minimis” amount under which a plan sponsor is required to correct an overpayment (or report the amount as ineligible for a rollover) is increased from $100 to $250. The de minimis increase also applies to the correction of excess amounts that do not exceed a statutory limit.

• Plan sponsors may now permit overpayment recipients to make repayments through an installment agreement, in addition to the option for a single sum payment.

• For defined benefit plans, plan sponsors may now correct overpayments via two new correction methods that reduce the burden on plan sponsors to repay amounts to the plan:
  1. 1. The Funding Exception Correction Method. If the plan’s adjusted funding target attainment percentage (AFTAP) is at least 100% on the correction date, no corrective repayments from the participant, beneficiary or plan sponsor are required. However, future benefit payments to the recipient(s) must be reduced to correct the benefit payment amount, and the recipient(s) must be notified that the overpayment amount is not eligible for rollover.
  2. 2. The Credit Contribution Method. A plan sponsor may reduce the amount required to be repaid to the plan (i) by the cumulative increase in the plan’s minimum funding requirements attributable to the overpayments from the plan year for which the overpayments are taken into account through the end of the plan year preceding the year of correction, or (ii) in certain circumstances by additional contributions paid to the plan in excess of minimum funding requirements after the first overpayment was made. However, future benefit payments to the recipient(s) must be reduced to correct the benefit payment amount. As with the Funding Exception Correction Method, no further corrective action is required, including any payments from the participant, beneficiary or plan sponsor.

ELIMINATION OF THE ANONYMOUS VCP SUBMISSION AND ADDITION OF THE PRE-SUBMISSION CONFERENCE

Under prior versions of the EPCRS, plan sponsors could make anonymous VCP submissions. This allowed plan sponsors to seek IRS approval of corrections for unusual or complex issues—for which there may be uncertainty about a proposed correction method—before providing identifying information about the plan and the plan sponsor. Beginning January 1, 2022, however, the IRS will no longer accept VCP submissions on an anonymous basis and will require identifying information—along with all applicable forms, documents and exhibits—be included with a VCP submission.

Instead, beginning January 1, 2022, the IRS will permit a plan sponsor’s representative to request an anonymous pre-submission conference with the IRS to discuss a plan sponsor’s eligibly for submission under the VCP and proposed corrective actions. The pre-submission conference serves a similar purpose by allowing a plan sponsor to discuss a proposed course of action to correct plan errors before submitting an application. A pre-submission conference may only be requested for matters that are eligible for correction under the VCP and that do not fall into the safe harbor correction methods outlined in the EPCRS appendices. Further, plan sponsor must be eligible and intend to submit a VCP application. There is no cost for this conference, but the plan sponsor’s representative must provide certain required information regarding the applicable failure and proposed correction via the Pay.gov website on Form 8950. The IRS has discretion whether to hold a pre-submission conference.

SELF-CORRECTION PERIOD EXTENDED TO THREE YEARS FOR SIGNIFICANT FAILURES

Plan sponsors have a limited period of time to self-correct “significant” operational and plan document failures using the Self-Correction Program (SCP). In the new EPCRS, the IRS extended this SCP eligibility period from the last day of the second plan year until the last day of the third plan year following the plan year in which the failure occurred. This, in turn, also expands plan sponsor eligibility to correct failures relating to employees’ elective deferrals that last for more than three months, but not longer than the SCP eligibility period described above.

SELF-CORRECTION BY RETROACTIVE PLAN AMENDMENT MADE EASIER

Under EPCRS, a plan sponsor can correct an operational failure through a retroactive plan amendment that conforms plan terms to plan operations in certain circumstances. EPCRS previously allowed such retroactive amendments only if the plan amendment met the following three requirements:

1. The amendment resulted in an increase of a benefit, right or feature;
2. The increase in the benefit, right or feature applied to all eligible participants; and
3. The increase in the benefit, right or feature is permitted under the Internal Revenue Code and otherwise complies with the rules of the EPCRS.

The new EPCRS removes the second requirement—that the increase in the benefit, right or feature applies to all participants—which is often the most difficult requirement to meet. This requirement’s removal expands the ability of plan sponsors to utilize retroactive plan amendment as a self-correction method for many operational failures.

EXTENDED SUNSET OF SAFE HARBOR SELF-CORRECTION OF AUTOMATIC DEFERRAL FAILURES

Plan sponsors may utilize a safe harbor correction method for employees’ elective deferral failures related to automatic contribution features in 401(k) plans. Previously, this safe harbor correction method was expected to sunset on December 31, 2020. However, the IRS extended this sunset period until December 31, 2023.

FINAL THOUGHTS

The IRS continues to take steps to try to help facilitate plan sponsor corrections of administrative and documentary errors in qualified plans. As with previous updates to the EPCRS, these changes should help reduce the cost and burden of common plan failure corrections, and they will provide welcome relief for many plan sponsors with respect to operational plan failures. Plan sponsors should work closely with counsel and their advisors to determine appropriate steps for the correction of plan administrative and documentary errors that occur from time-to-time.