401(k): Updates to EPCRS Correction Programs Encourage Employers to Self-Identify, Correct Mishaps

On July 16, 2021, the IRS issued Revenue Procedure (“Rev. Proc.”) 2021-30, the most recent comprehensive official guidance concerning the IRS’s Employee Plans Compliance Resolution System (“EPCRS”). (See our reference article entitled “401(k): EPCRS Overview” for a general discussion of EPCRS.) The last comprehensive update to EPCRS was released in April 2019 (see our article entitled “IRS Revises EPCRS Guidance, Expands Corrections Available Under Self-Correction Program“ for details). In keeping with recent trends, the new Rev. Proc. further expands and eases the rules for correcting operational and other failures under qualified retirement plans, including 401(k) plans, to encourage plan sponsors to voluntarily identify and correct such failures before they are discovered by the IRS. Rev. Proc. 2021-30 generally supersedes the last previous comprehensive official EPCRS update, Rev. Proc. 2019-19.

The IRS has published an easy-to-understand summary of the new Rev. Proc., available at New Revenue Procedure 2021-30 updates IRS correction program for retirement plans (govdelivery.com).

DISCLAIMER: This article is intended as a general overview of Rev. Proc. 2021-30 as it affects 401(k) plans and is not meant to address the details of plan qualification, EPCRS generally, previous IRS guidance on the topic, or any provision not relating directly to 401(k) plans (such as provisions relating to defined benefit retirement plans). As always, be sure to consult with your own ERISA attorney or other professional advisor for individualized advice with respect to your plan’s unique situation.

Background. Retirement plans, such as 401(k) plans, must meet a considerable number of legal requirements in order to remain “qualified” (i.e., to retain their tax-exempt status), and to avoid various penalties, legal sanctions and possible lawsuits. The large number of the requirements, and their complexity, virtually assures that minor infractions or failures may creep in from time to time for almost any plan, no matter how carefully administered. Prior to EPCRS, there was no easy way to correct most of these failures – and the consequences were generally severe.

Responding to this dilemma, the IRS developed EPCRS as a formal means by which plan sponsors or administrators can find and correct operational and other plan errors, before the IRS uncovers them through audit or by another means. By finding and correcting errors proactively on their own, plan sponsors and administrators generally can take corrective action at a fraction of the cost of what might be the case if the IRS were to first identify the defects. In addition to holding costs down, this encourages compliance with the law and accuracy of plan administration.

EPCRS has evolved substantially since its introduction as a consolidation of various lesser correction programs in 1998. In general, the program has gradually become more flexible, easier to use, and more in keeping with the IRS’ goal of encouraging plan sponsors to keep their plans in compliance with all legal requirements, and to seek out potential failures for correction as quickly and efficiently as possible.

Changes Made by Rev. Proc. 2021-30. Although the recent guidance does not make major, wholesale changes to EPCRS, there are several noteworthy revisions. In the aggregate, the changes should further encourage plan sponsors and administrators to take advantage of the system, as opposed to taking a “head in the sand” approach to potential problems.

The major changes introduced by Rev. Proc. 2021-30 that affect 401(k) plans are as follows:

• Expansion of self-correction for significant operational failures. The Rev. Proc. extends the correction period of “significant” operational failures under the Self-Correction Program (‘SCP”) to three years (up from two years previously). As opposed to “insignificant” errors which generally may be corrected at any time, “significant” errors are identified on a “facts and circumstances” basis, and usually tend to involve a relatively greater number of plan participants, plan assets, and/or aggregate number of failures.
• Expansion of self-correction for retroactive plan amendments. The Rev. Proc. makes it easier to use retroactive plan amendments to correct certain operational failures, by removing the former requirement that all participants in the plan benefit by the retroactive amendment – a requirement which was frequently criticized as being sometimes onerous and often counterproductive.
• Extension of correction method for automatic enrollment failures. The Rev. Proc. extends by three years the “sunset” of a “safe harbor” correction method prescribed for use in the case of missed elective deferrals for eligible employees who are subject to an automatic contribution feature. The safe harbor correction method is now scheduled to expire (“sunset”) on December 31, 2023 (one year later than the previous “sunset” date of December 31, 2022).
• Increased threshold for de minimis correction amounts. The threshold amount for certain de minimis amounts, defined as amounts that are deemed to be so small that a plan sponsor is generally not required to implement any correction for them, is increased to $250 (up from $100).
• Elimination of anonymous VCP submissions. The Rev. Proc. eliminates anonymous submissions under the Voluntary Correction Program (“VCP”), effective January 1, 2022. Anonymous VCP submissions are currently available in certain circumstances for plans that do not wish to risk identifying themselves, yet want to take advantage of VCP to correct issues on an IRS-approved basis. On and after January 1, 2022, anonymous VCP submissions will generally be replaced by “anonymous pre-submission conferences” (see below).
• Anonymous Pre-Submission Conferences. In place of anonymous VCP submissions, the IRS will permit plan sponsors (or their representatives) to make an anonymous written request for a pre-submission conference to discuss a potential VCP submission. Following the pre-submission conference, the plan sponsor may choose to submit the VCP request, but it can no longer make the actual VCP submission on an anonymous basis. There is no charge for the pre-conference submission; however, there are certain limitations on their availability, and they will be granted at the discretion of the IRS.
• Audit CAP Sanctions payable via Pay.gov website. Payment of any and all sanctions mutually agreed to under the Audit CAP program generally must now be accomplished by means of the government’s Pay.gov website. According to the Rev. Proc., this rule does not apply to a plan sponsor “who does not have the capability to use the methods on the Pay.gov website.”

Effective Dates. Rev. Proc. 2021-30 is generally effective on and after July 16, 2021, with certain exceptions:

• The extension of the “sunset” of the safe harbor correction method for missed elective deferrals for eligible employees subject to an automatic contribution arrangement (i.e., from December 31, 2020 to December 31, 2023) is effective as of January 1, 2021.
• The elimination of anonymous VCP submissions and the establishment of anonymous pre-submission conferences become effective on and after January 1, 2022.
• The provision regarding payment of Audit CAP sanctions via the Pay.gov website is effective on and after January 1, 2022.

Final Note. As in past iterations of official EPCRS guidance, some of the most useful material is contained in the Appendices to Rev. Proc. 2021-30, which incorporate a number of examples of compliance failures, along with correction methods and earnings calculations, to which the IRS has already given its approval. Seasoned practitioners tend to rely heavily on the examples and methods spelled out in the Appendices when preparing VCP submissions and self-correction memoranda, as these are evidence of what the IRS considers to be acceptable in a number of given circumstances – including circumstances that, although not identical to those in the examples, may be substantially similar.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.