United States: Easier, Less Costly Alternatives For Correcting Retirement Plan Mistakes

Last Updated: April 16 2015
Article by B. David Joffe

In two recent Revenue Procedures, the Internal Revenue Service (IRS) has modified the Employee Plans Compliance Resolution System (EPCRS), the IRS correction program for retirement plans. Revenue Procedure. 2015-27 reduces compliance fees relating to plan loan failures and clarifies the correction methods for overpayments. Revenue Procedure 2015-28 provides a new safe harbor for automatic contribution features as well as safe harbors for failures involving elective deferrals that are of limited duration. These changes will make several corrections under EPCRS easier and less costly.


EPCRS sets forth a comprehensive system of correction programs for sponsors of retirement plans. These generally include plans intended to satisfy the requirements of Internal Revenue Code (Code) Sections 401(a), 403(a), 403(b), 408(k), and 408(p). In general, EPCRS allows plan sponsors to correct failures and continue to provide employees with retirement benefits without adversely affecting the tax qualification of the plan.

Excess Amounts

The IRS has made two corrections to liberalize relief for certain excess amounts:

Overpayments—EPCRS requires that reasonable efforts be made to recover overpayments made by a plan. Troubled by some employers seeking to recoup large amounts paid over a long period of time from participants for whom recoupment would be a financial hardship, Rev. Proc. 2013-27 clarifies that, instead of pursuing a recovery from the participant, the employer may contribute the overpaid amount—plus earnings—to the plan.

Annual Additions—Code Section 415(c) limits the total amount that can be contributed on behalf of a participant to a defined contribution plan (for 2015, $53,000 excluding catch-up contributions). To correct excess annual additions, the excess amount must be paid to the participant or forfeited, as applicable. Under prior guidance, the period for correcting this failure was two-and-a-half months after the end of the affected plan year. The new guidance greatly extends this period to nine-and-a-half months.

Compliance Fees

The IRS has significantly reduced the compliance fees in certain cases:

Required Minimum Distributions—For submissions made under the Voluntary Correction Program (VCP), the filing fee is lowered if the only failure is the failure to comply with required minimum distribution requirements under Code Section 401(a)(9), which basically requires minimum distributions for former employees after they reach age seventy and a half. The lowest rate, $500, applies to plans with up to 150 participants. Previously, the only reduced rate was $500 for corrections involving up to 50 participants. For plans with 151 to 300 participants, the amount is $1,500. If the number of participants is greater than 300, only then would the general fees apply.

Plan Loans<.B>—The guidance also significantly lowers the compliance fee for plans if the only failure is an error related to plan loans under Code Section 72(p), which sets forth rules on the amount and timing of repayment of loans. There are now lower fees from $300 to $2,000 if the number of participants with loan failures is up to 150. If the number of participants is over 150, the fee is $3,000. Previously, employers did get a 50% discount off the standard fees, which are based on the total number of participants in the plan, but the new fees are less even with the discount.

Failure to Make Deferral Contributions

The IRS has provided new, less costly safe harbors to correct the failure to make employee deferral contributions:

Automatic Contribution ArrangementsIn Revenue Procedure 2015-18, the IRS made a change that may dramatically reduce the cost of correction for plans with automatic contribution arrangements. Under prior guidance, to correct automatic contribution failures, the employer had to make a 50 percent corrective contribution to the plan plus any required matching contributions. Under the new guidance, if the failure is corrected within nine-and-a-half months after the end of the plan year (or, if notified by the affected employee, the first payroll after the end of the month following the month the employee notified the employer), the only contribution the employer will have to make is the amount of the matching contribution that would have been made if the automatic deferrals had commenced timely. Employers are required to send a notice to affected employees no later than 45 days after the date on which corrections begin. Furthermore, if the employee has not made an investment election, earnings attributable to the missed contributions may be calculated based on the plan's default investment alternative. This correction method is only available for failures occurring prior to December 31, 2020.

Failure to Implement Elective Deferrals—Revenue Procedure 2015-18 also provides a safe harbor for corrections outside of automatic enrollment. If the failure to make elective deferrals is corrected within three months, no employer contribution is required. However, if the failure is corrected after three months but prior to the end of the second year following the year of the failure, the employer must make a corrective contribution of 25 percent of the missed deferrals—half of the prior requirement to make a 50 percent corrective contribution. Corrective matching contributions would have to be made as well.

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.

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