The IRS issued Rev. Proc. 2013-12 in December 2012, expanding and updating guidance for plan sponsors about how to correct retirement plan qualification errors, and re-opening the program for operational errors in 403(b) plans. Rev. Proc. 2013-12 is the most recent in a series of IRS revenue procedures detailing the requirements and rules for the Employee Plans Compliance Resolution System (EPCRS). The program is effective for voluntary correction program with IRS approval (VCP) submissions made on or after April 1, 2013, but may be used earlier under certain circumstances.
EPCRS continues to provide three major types of processes for correcting operational, document and demographic errors:
- The self-correction program (SCP) can be used at any time to correct insignificant operational errors at no cost to the employer other than the cost of making the plan corrections, such as paying additional contributions or earnings to the plan.
- The VCP is used to correct significant operational errors that are more than two years old as well as nonamender and demographic errors. The program requires a filing with the IRS and a filing based on the type of correction and the number of participants involved.
- The correction on audit program (Audit CAP) may be used if during an audit, a plan is found to have compliance failures that were not previously corrected by SCP and/or VCP, and the fees or penalty for correction may significantly exceed the cost borne by a sponsor who did use SCP or VCP.
The revised program continues to stress the program's original principles:
- Sponsors are encouraged to take advantage of the program and self-correct errors.
- Timely and efficient correction methods should be used.
- The EPCRS program should be consistently administered.
- Program fees, which may often be less than sanction amounts imposed as a result of an audit, should motivate employers to voluntarily self-correct or to submit a VCP application.
- Sponsors should be able to rely on the program to maintain their plans' tax-qualified status.
403(b) plan eligibility to use EPCRS reopened
The IRS had suspended program eligibility for many types of errors in 403(b) plans so that it could make correction principles conform to the requirements of the new 403(b) regulations effective for 2009 plan years. With Rev. Proc. 2013-12, the IRS has reopened the program for 403(b) plans and expanded guidance for these types of plans. 403(b) plan sponsors can now use the program to correct demographic, plan document and operational errors. For instance, if the plan sponsor did not adopt a plan document in a timely way that satisfied the requirements of the new 403(b) regulations, the program allows the sponsor to submit a document and pay a fee that is 50% of what nonamenders must typically pay. And, although the IRS has not started to issue determination letters to 403(b) plans, the program explains that if employers had a plan document in place Jan. 1, 2009, and made a good-faith effort to operate the plan in accordance with the document, they can use the program to correct operational failures before and after Jan. 1, 2009.
Except for certain special rules, such as the nonamender rule discussed previously, the correction methods for 403(b) plans are generally the same as those used by 401(k) and other qualified plans.
New forms required for VCP submissions
New Forms 8950 and 8951 are now required to be attached to all VCP submissions. Form 8950 is the application for the VCP submission, and Form 8951 calculates the user fee that must be submitted with the VCP application. VCP program fees range from $750 for very small plans to $25,000 for plans with more than 10,000 participants. In many cases, these filing fees are substantially less than the penalty the IRS could impose for qualification defects discovered and corrected through an audit.
The EPCRS provides correction principles and general applicability rules, as well as many specific examples of permissible correction methods. For example, if eligible participants were excluded from participation in a 401(k) plan for all or part of a plan year, the employer identifies all affected participants and credits them with a plan contribution equal to 50% of the average contribution percentage deferred by their group (nonhighly compensated employees or highly compensated employees), plus 100% of any match the participants would have received, plus lost plan earnings. Appendix B of the revenue procedure provides examples of permitted methods by which lost plan earnings may be calculated.
Ongoing initiatives and the program's future
The EPCRS has long been considered a useful tool for maintaining retirement plans' qualified status and continues to evolve as the regulatory and technological landscape for retirement plans changes. The current program asks for comments on emerging areas such as corrections to 401(k) plans that have automatic enrollment, automatic increases in deferral percentages, safe-harbor contributions and Roth contribution features.
It is also an important risk management tool for sponsors of qualified retirement plans, and plan sponsors should regularly evaluate their plans for errors and self-correct them wherever possible. This proactive approach may save money by avoiding IRS audit corrections and mitigates the risk that repetitive errors may increase if not corrected early.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
