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IRS Releases Changes to the Employee Plans Compliance Resolution System

Last week, the IRS released Revenue Procedure 2015-27. The guidance modifies the Employee Plans Compliance Resolution System (EPCRS) under Revenue Procedure 2013-12.  Among the changes are the following: 

  • Clarifies correction rules for overpayments made to participants.  The IRS indicates that some employers have interpreted EPCRS to require recoupment of any overpayment, including large amounts paid over a long period of time due to plan administration error, thereby causing financial hardship to affected participants.  The guidance clarifies that instead of pursuing a recovery from a participant, the employer itself may contribute the overpaid amount, plus earnings, into the plan.  The IRS requests comments on issues related to overpayments such as circumstances under which employers should be required to make corrective contributions rather than recouping the overpayment from the participant, and whether special rules are appropriate if the overpayment is a result of calculation errors.
  • Modifies the Self -Correction Program for IRC Section 415(c) annual additions failures.  Section 415(c) limits the total amount that can be contributed on behalf of each participant.  For 2015, the limit is $53,000 (including pre-tax, after-tax and employer contributions).  To correct excess annual additions, the excess amount must be paid out to the participant or forfeited as applicable.  Under previous guidance, the period for correcting was 2-1/2 months after the end of the affected plan year.  The new guidance extends this period to 9-1/2 months.
  • Lowers the compliance fee for Voluntary Correction Program (VCP) submissions if the only failure being reported is a failure to comply with minimum required distributions under IRC Section 401(a)(9).  The lowest rate, $500, now applies to plans with up to 150 participants (previously was limited to plans with 50 or fewer participants).  The rate for plans with between 151 and 300 participants is now $1,500.  Previously, a plan with 300 participants would be required to pay a compliance fee of $5,000 even if this were the only failure.  The guidance also lowers the compliance fee for plans if the only failure an error related to plan loans under IRC Section 72(p), which limits the amount and timing of repayment on such loans.  There is now a lower tiered fee schedule for loan failures affecting up to 150 participants, ranging from $300 to $3,000 based on the number of affected participants. 
  • New acknowledgement letter form and other VCP model document changes.  There is a new series of forms (Form 14568 series) covering the types of failures that were previously covered by Appendix C. 

This week, the IRS released additional EPCRS guidance in Revenue Procedure 2015-28 relating to the failure to implement automatic contribution arrangements or salary deferral elections by employees. Under previous EPCRS requirements, in order to correct these failures, the employer had to make a 50 percent make-up contribution to the plan (not including the match that the employee’s deferrals would have generated).  Many employers viewed this as an unfair windfall to affected employees because they received the 50 percent contribution in addition to their regular compensation.  The new guidance modifies EPCRS as follows:

  • If the failure to implement the automatic contribution is fixed within 9-1/2 months after the end of the plan year of the failure 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 match that would have been associated with the employee deferrals had they been timely implemented. 
  • There is also a required notice to affected employees no later than 45 days after the date on which corrections begin.
  • 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. At that time, the IRS will consider whether to extend the safe harbor correction method, taking into account the extent to which there is an increase in the number of plans implemented with automatic contribution features. 
  • The guidance also provides for corrections of failures to properly implement employee elective deferrals. If corrected within three months, no employer contribution is required.  If 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.