In April of 2019, the Internal Revenue Service (“IRS”) issued an update to the program allowing employers to voluntarily correct certain retirement plan tax-qualification failures.  This program, known as the “Employee Plan Compliance Resolution System” (“EPCRS”), includes rules and guidelines for situations where a retirement plan sponsor must formally submit the failures to the IRS under the “Voluntary Correction with Service Approval” (“VCP”) portion of EPCRS as well as situations where a plan sponsor can independently implement correction of the failure itself under the “Self-Correction Program” (“SCP”) segment of EPCRS without direct IRS oversight.  In a welcome move, this most recent update to EPCRS has expanded certain situations where a retirement plan sponsor can independently correct a tax-qualification failure under SCP.  The remainder of this article is dedicated to exploring some of the new scenarios where a plan sponsor is permitted to “self-correct” tax-qualification defects.

Notwithstanding the expanded role of SCP considered within this article, it is important to remember that the correction of any retirement plan tax-qualification failure is a technical and complicated process which must be performed in specific compliance with many detailed rules and requirements.  Thus, despite the “do-it-yourself” message suggested by the name of the “Self-Correction Program”, we strongly recommend that all VCP and SCP correction efforts only be performed under the guidance of a qualified retirement plan service provider which usually requires the retention of a competent ERISA attorney.

Participant Loan Failures

Prior to the recent update to EPCRS, SCP was extremely restrictive with respect to the correction of participant loan failures.  Under prior guidance, correction of participant loan failures essentially was not allowed under SCP.  However, the 2019 EPCRS update now allows certain loan failures to be corrected under SCP which means that, in some circumstances, a loan default can now be avoided by utilizing SCP.

In this regard, EPCRS now allows the self-correction of participant loan failures in circumstances where: 1) loan repayments are not made timely causing the loan to go into default; 2) a participant’s spouse does not provide written consent for the loan (if necessary); and 3) a participant receives more plan loans than permitted under the terms of the plan (ex. plan provides for only one loan per participant but participant is allowed to obtain two loans from the plan).

Despite this expansion to the correction of loan failures under SCP, certain loan failures remain correctable only under VCP.  More specifically the following loan failures all require a formal submission to the IRS under VCP: 1) loans that exceed the statutory maximum loan amount; 2) loans that exceed the statutory maximum loan repayment term; and 3) loans that violate the level amortization requirement.

It is interesting to note that a participant loan failure triggers a tax-qualification defect under the Internal Revenue Code (“IRC”) that is subject to enforcement by the IRS while also triggering violations under the Employee Retirement Income Security Act (“ERISA”) that are subject to enforcement by the Department of Labor (“DOL”).  Prior to the new guidance, the DOL indicated that it would accept correction of loan failures under VCP as full correction for ERISA purposes.  However, that DOL guidance was promulgated at a time that the IRS essentially did not allow for correction of loan failures outside of VCP.  Thus, now that the IRS is allowing the self-correction of certain loan failures that previously required correction under VCP, a conflict has been created.

As plan sponsors take advantage of the new opportunity to self-correct loan failures under SCP, such failures will be resolved for IRS IRC purposes but not DOL ERISA purposes since the DOL does not recognize the self-correction of loan failures under SCP as full correction for ERISA purposes,.  Thus, unless or until the DOL updates its guidance on this matter, self-correction of loan failures under SCP will not alleviate a plan sponsor’s potential liability under ERISA for such failure.  Hopefully, the DOL will take steps in the near future to align its prior guidance with this new development in order to remedy this concern.

Retroactive Plan Amendments to Resolve Certain Operational and Document Failures

In addition to prior versions of EPCRS being extremely restrictive with respect to the correction of participant loan failures under SCP, retroactive amendments were not routinely permitted under SCP.  In the past, retroactive plan amendments were permitted under SCP but generally only in the context of the early inclusion of not yet eligible employees and with regard to the granting of loans and/or hardship distributions when the plan did not explicitly allow for them.

The 2019 EPCRS update has now expanded the situations under which a retirement plan sponsor can resolve operational defects through retroactive plan amendments.  This should prove valuable in situations where the terms of a plan were more restrictive than its operation. Under the new guidance, a retirement plan is eligible to self-correct via retroactive amendment to conform the terms of the plan to its operation if the amendment: 1) results in an increase in a benefit, right or feature provided under such plan; 2) is available to all eligible employees; and 3) otherwise complies with the Code and the correction principles of the EPCRS.  Although extremely fact dependent, it is expected that most SCP corrections of this type will need to be completed within approximately two plan years of its occurrence.

Self-correction is also now available to correct certain plan document failures such as a failure to execute a required plan amendment or a restatement if the failure is corrected within approximately two plan years of its occurrence and such failure did not involve the execution of the initial plan document.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.