For several years now, the IRS has maintained its Employee Plans Compliance Resolution System (“EPCRS”) which allows sponsors of tax-favored retirement plans (e.g., 401(k), profit sharing, 403(b) and SEP plans) to correct various plan errors with respect to either operation or documentation in order to avoid the plans losing their tax-favored status. EPCRS consists of three separate components: (1) the Self-Correction Program (“SCP”), which allows sponsors to correct certain errors on their own; (2) the Voluntary Compliance Program (“VCP”), which allows sponsors to correct certain errors by making a submission to the IRS, usually accompanied by a fixed fee, and obtaining IRS approval of the proposed correction method; and (3) the Audit Closing Agreement Program (“Audit CAP”), which allows sponsors to correct certain errors, typically discovered in an IRS audit, by negotiated agreement with the IRS and usually accompanied by payment of a sanction. EPCRS is set forth in Revenue Procedures issued by the IRS and last week the IRS released Revenue Procedure 2008-50 (link here), which updates and expands on the last version of EPCRS released in 2006. Some of the key changes under the new Rev. Proc. include:
- Liberalizing the extent to which errors eligible for SCP must be corrected within or following the correction period (generally, the last day of the 2nd plan year following the plan year for which an error occurred) to be considered “substantially completed”;
- Expanding correction methods for the improper exclusion of employees, including with respect to Roth contributions, missed catch-up contributions and failure to implement employee deferral elections, whether corrected by SCP or VCP;
- A new application format for all VCP filings (at Appendix D);
- Expanding the type of failures that can use “Streamlined Application” procedures for certain VCP filings (at Appendix F), including the addition of several supporting schedules pertaining to specific failures and types of plans;
- Reducing the VCP compliance fee by 50% for filings made solely to correct plan loan failures (helpful in VCP filings where deemed distribution errors occurred and the sponsor wants to report the distributions on Forms 1099-R for year of correction rather year of failure, but now the sponsor is required to specifically request year of correction treatment);
- For purposes of calculating earnings in certain correction situations, allowing use of the Department of Labor’s online earnings calculator otherwise used in the DOL’s fiduciary correction program;
- Conditions under VCP filings where the IRS will not pursue the 6% excise tax on excess contributions to an IRA (such as when an improper distribution from a plan is rolled over into an IRA) or the 10% additional income tax on early distributions;
- Clarifying when sponsors should submit an application for an IRS determination letter in conjunction with a VCP filing or in relation to self-correction by plan amendment.
The 2006 Revenue Procedure continues to apply through the end of 2008, but plan sponsors can choose to apply the new 2008 Revenue Procedure starting September 2, 2008. EPCRS continues to be a popular and very successful tool for plan sponsors to use for correction of inadvertent errors in the operation or documentation of retirement plans.