IRS modifies 2013 version of EPCRS to provide improvements and updates

The IRS has issued a revenue procedure that modifies the updated version of Employee Plans Compliance Resolution System (EPCRS) in Rev. Proc. 2013-12. The EPCRS permits plan sponsors to correct certain plan qualification failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. The components of EPCRS are the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP). Rev. Proc. 2013-12 updated the prior consolidated statement of the correction programs under EPCRS issued in 2008. The IRS is making limited modifications and clarifications to Rev. Proc. 2013-12 to improve and update EPCRS, which are generally effective July 1, 2015. However, plan sponsors may apply the provisions of the new revenue procedure on or after March 27, 2015. Rev. Proc. 2013-12 is modified, but not superseded.

Clarification for certain plan overpayments

The IRS clarifies that for certain overpayments, as defined in sections 5.01(3)(c) and 5.02(4) of Rev. Proc. 2013-12, a plan may use correction methods other than the correction methods set forth in sections 6.06(3) (defined benefit plans) and 6.06(4) (defined contribution and 403(b) plans) of Rev. Proc. 2013-12. Any correction of a failure should be reasonable and appropriate for the failure. Under the correction rules of 6.06(3) and 6.06(4), the employer is to take reasonable steps to have the overpayment returned to the plan. The IRS notes that it has been informed that some plans have demanded recoupment of large amounts from plan participants and beneficiaries because of plan administration errors made over lengthy periods of time, and that plan participants and beneficiaries, particularly those who are older individuals, may have financial difficulty meeting some corrective actions that have been sought by plan administrators, including the return of overpayments plus substantial accumulated interest.

IRS has revised sections 6.06(3) and 6.06(4) of Rev. Proc. 2013-12 to clarify that there is flexibility in correcting an overpayment under EPCRS under which a correction may not need to include requesting that an overpayment be returned to the plan by plan participants and beneficiaries. For example, depending on the nature of the overpayment failure (such as an overpayment failure resulting from a benefit calculation error), an appropriate correction method may include using rules similar to the correction methods of sections 6.06(3) and 6.06(4) in Rev. Proc. 2013-12, but having the employer or another person contribute the overpayment amount (with appropriate interest) to the plan in lieu of seeking recoupment from plan participants and beneficiaries. Another possible correction method would be for the plan sponsor to adopt a retroactive amendment to conform the plan document to the plan’s operations in accordance with section 4.05 of Rev. Proc. 2013-12. The IRS notes that it intends to make further revisions to Rev. Proc. 2013-12 regarding the correction of overpayments and seeks comments on this issue.

Self-Correction Program

Section 4.04 of Rev. Proc. 2013-12 is revised to provide for an extended period of time to correct excess annual additions through the return of elective deferrals to affected employees by changing the reference “two and a half months” to “9 1/2 months.” Section 4.04 concerns the requirement that plans have established practices and procedures to comply with applicable Code provisions in order to be eligible for SCP. The IRS is revising section 4.04 so that repeated corrections of excess annual additions will not prevent certain plans from satisfying the SCP requirement to have established practices and procedures as long as the plan corrects excess annual additions through the return of elective deferrals to affected employees within 9 1/2 months after the end of the plan’s limitation year.

Determination letters

The IRS is revising sections 6.05(1), 6.05(2), and 6.05(3)(c) of Rev. Proc. 2013-12 to clarify that, if corrective plan amendments are used to correct qualification failures (as defined in section 5.01(2)), the requirement to submit a determination letter application to the IRS does not apply to certain amendments made to prototype or volume submitter plans. Specifically, the requirement to submit a determination letter application to the IRS does not apply to corrective amendments made to pre-approved plans on which the adopting employer has reliance, if the amendments are part of an adopted prototype or volume submitter plan on which the adopting employer continues to have reliance after the adoption of the corrective amendments. Section 6.05(1) is also revised to provide that a determination letter application is not required to be submitted if more than 12 months have passed since distribution of substantially all plan assets following a plan termination.

VCP submission documents

Sections 11.01 and 11.02 of Rev. Proc. 2013-12 are revised to require that applicants electing to use model VCP submission documents submit such documents by completing the Form 14568 series. As the model VCP submission documents are now published on forms, Appendix C model VCP submission documents are no longer part of Rev. Proc. 2013-12. In addition, section 11.11 of Rev. Proc. 2013-12 has been changed to provide that applicants wishing to obtain an acknowledgement of receipt of a VCP submission must use IRS Letter 5265, Form 8950 Application for Voluntary Correction Program Acknowledgment Letter. Appendices C and D of Rev. Proc. 2013-12 are removed.

Compliance fees

The IRS is revising section 12.02(2) of Rev. Proc. 2013-12 to expand the availability of a reduced compliance fee for submissions under VCP that involve the failure to satisfy the minimum distribution requirements. In addition, the changes to section 12.02(3) of Rev. Proc. 2013-12 modify the method for determining compliance fees for submissions under VCP relating solely to participant loans that do not satisfy the requirements of Code Sec. 72(p). The IRS explains that this change is being made to provide an improved method for determining compliance fees for large plans that have a relatively small number of loans that do not satisfy the requirements of Code Sec. 72(p).

Other changes

The IRS has removed a reference to the Social Security letter forwarding program because the Social Security Administration no longer provides that method for locating lost plan participants who are owed additional retirement benefits. In addition, the IRS has made numerous changes to reflect appropriate citations and cross references.

Future issuances

It is expected that the EPCRS revenue procedure will continue to be updated, in whole or in part, from time to time, including further improvements to EPCRS based on comments received. Thus, the IRS and Treasury Department continue to invite further comments on how to improve the EPCRS.

Source: IRS Rev. Proc. 2015-27.

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