United States: IRS Expands Self-Correction Program, Provides Welcome Relief For Plan Sponsors

The IRS recently released an updated version of EPCRS, the IRS's program for correcting errors that occur under tax-qualified retirement plans. The latest version of EPCRS makes it easier for plan sponsors to self-correct certain types of plan loan, operational and plan document failures without filing a VCP submission.

In Depth

Late last month, the Internal Revenue Service (IRS) issued Revenue Procedure 2019-19, an updated version of the Employee Plans Compliance Resolution System (EPCRS), the IRS's comprehensive program for correcting tax-qualified plan errors. The most recent update to EPCRS is designed to expand the types of failures that are eligible to be self-corrected. More specifically, the latest updates to EPCRS allow plan sponsors to self-correct certain plan loan and plan document failures, and to self-correct certain additional operational failures by adopting retroactive plan amendments. These changes are described below.

Self-Correction Now Available for Certain Plan Loan Failures

Plan loan failures are one of the most common plan-related errors. As a result, plan sponsors and administrators have long advocated that the IRS allow plans to self-correct loan failures outside of the Voluntary Correction Program (VCP), which requires a formal filing with the IRS and payment of a compliance fee. The most recent EPCRS update does just that, permitting self-correction of a number of loan-related failures:

  • Missed Loan Repayments. Participants sometimes fail to repay plan loans in accordance with the terms of the plan. This can occur when a participant's loan repayment is made in an incorrect amount, is late or is not made to the plan at all. When a participant fails to properly repay a plan loan, the loan is defaulted and the outstanding balance of that loan becomes immediately taxable to the participant. Historically, to remedy this type of failure, plan sponsors were required to file a VCP submission with this IRS. Now, however, plan sponsors can self-correct these errors outside of VCP by requiring a single-sum repayment of the loan, reamortizing the outstanding loan balance, or some combination of the two approaches.
  • Reporting of Deemed Distributions in Year of Correction. If a plan loan failure is not corrected, the outstanding loan balance generally becomes taxable to the participant in the year of the failure. To avoid this treatment, plan sponsors were previously required to file a VCP submission and to specifically request that the plan loan be taxed in a later year. However, the most recent EPCRS update eliminates this requirement. This means plan sponsors do not need to request relief from the IRS to report a loan as taxable in the year the loan failure is corrected (rather than in the year of the failure).
  • Failure to Obtain Spousal Consent. To receive a loan under certain plans (for example, money purchase pension plans), a participant must first have spousal consent. Historically, to correct a failure to obtain spousal consent, plan sponsors were required to file a VCP submission. Under the most recent EPCRS update, however, this type of failure can now be self-corrected by notifying the participant and the participant's spouse of the failure and requesting the required consent. Notably, if consent is still not obtained, correction must be made through VCP.
  • Failure to Properly Apply Limit on Number of Plan Loans. Traditionally, if a plan sponsor offered plan loans to participants under a plan that did not specifically allow such loans, the IRS permitted the plan sponsor to self-correct the error by adopting a retroactive amendment conforming the terms of the plan to its operation. However, this relief did not extend to situations where a participant was mistakenly allowed to receive a number of plan loans that exceeded the number otherwise permitted by the plan. For example, if a plan provided that a participant could only have one outstanding loan at any given time, but a participant was allowed to receive two loans, this failure was not correctible outside of VCP. However, under the updated EPCRS, plan sponsors that satisfy certain requirements can now self-correct the error by adopting a retroactive plan amendment conforming the terms of the plan to its operation.

Importantly, while the updated EPCRS provides welcome relief for plan sponsors who have long sought the ability to self-correct plan loan errors, not all loan failures can be self-corrected. In particular, plan loans that violate the tax code's maximum dollar limit, the maximum loan period or the level amortization requirements may not be self-corrected. Instead, plan sponsors must use VCP to correct these errors. In addition, although the Department of Labor (DOL) will issue a no-action letter under its Voluntary Fiduciary Correction Program for certain defaulted loan failures that are corrected under VCP, the DOL indicated that it will not extend this practice to loan failures that are self-corrected.

Self-Correction Also Available for Additional Operational and Plan Document Failures

The updated EPCRS also expanded the types of plan document failures and operational failures that may be self-corrected.

First, certain operational failures may now be corrected by adopting a retroactive plan amendment to conform the terms of the plan to plan operation. To do so, three conditions must be satisfied: (1) the amendment must result in an increase of a benefit, right or feature; (2) such increase must be available to all eligible employees; and (3) providing the increase must be permitted under the tax code and satisfy the correction principles of EPCRS. Importantly, it appears that self-correction for these types of failures still only applies to errors that are treated as "insignificant" by the IRS. Because plan sponsors may only use the retroactive amendment correction method if an error affects all eligible employees, it may be difficult to satisfy this requirement for operational errors that extend beyond two plan years (the period during which significant plan failures may be treated as insignificant and self-corrected).

Second, plan document failures, including the failure to timely adopt required or interim amendments, may now be self-corrected as long as the plan has a favorable determination or opinion letter from the IRS and the correction is made within the period required for self-correcting significant failures (typically two plan years). Importantly, the failure to timely adopt an initial plan document or a written 403(b) plan are not eligible for self-correction. In addition, the failure to timely adopt discretionary plan amendments also cannot be self-corrected.

Lastly, the updated EPCRS also expands the availability of self-correction to fix certain failures to obtain spousal consent for distributions other than plan loans.


The most recent revisions to EPCRS greatly expand the availability of self-correction for some of the most common plan failures. Like many other recent updates to EPCRS, these changes will help reduce the cost and burden of correcting many of the most common (and often minor) plan failures, and will provide welcome relief for many plan sponsors.

IRS Expands Self-Correction Program, Provides Welcome Relief For Plan Sponsors

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