Sponsors of qualified retirement plans are responsible for operating their qualified retirement plans (e.g., 401(k), 403(b), pension plans) in compliance with applicable IRS rules in both form and in operation. Such plans must be administered in accordance with their written terms and must be operated in compliance with all statutes and regulations applicable to tax-qualified retirement plans under the Internal Revenue Code (IRC). Plan document and operational failures in the administration of the plan could theoretically result in plan disqualification, a loss of the plan’s tax benefits for participants, loss of deduction for the employer and taxation of trust assets.
The IRS’s qualified plan correction program, the Employee Plans Compliance Resolution System (EPCRS), allows retirement plan sponsors to avoid disqualification by making plan corrections by means of self correction, by making a voluntary submission or obtaining a closing agreement.
Effective April 19, 2019, IRS Revenue Procedure (Rev. Proc.) 2019-19, modifies and supersedes prior IRS guidance contained in Rev. Proc 2018-52. For failures that occurred before April 19, 2019, the prior guidance in Rev. Proc. 2018-52, remains applicable for corrections.
Rev. Proc. 2019-19 makes substantive changes to the EPCRS’s Self-Correction Program. This expansion is a positive development, because under the Self-Correction Program, the plan sponsor is entitled to relief on audit without having to make any submission or pay any fee, assuming that all requirements for eligibility and correction methods set forth in the Rev. Proc. are satisfied. Generally, the Self-Correction Program is available where plan failures are considered insignificant or have occurred within a two-year correction period.
Correction by plan amendment
Previously, the correction of plan compliance failures by plan amendment was permitted under the Self-Correction Program for certain failures, including exceeding compensation limits, early entry situations and when a plan processed a loan or hardship distribution when the plan did not allow for such loans or hardships. The Rev. Proc. extended the Self-Correction Program to allow for correction by plan amendment, provided that:
- The plan amendment would result in an increase of a plan benefit, right or feature
- The increase in the benefit, right or feature is available to all eligible employees
- The increase in the benefit, right or feature is otherwise permitted under the Internal Revenue Code and complies with a correction method specified in the Rev. Proc.
Correction of plan loan failures
Under the Rev. Proc., the Self Correction Program is now open for correcting certain plan loan failures including relief for defaulted plan loans, relief for the failure to obtain spousal consent to participant loans from the plan and a method for correcting a failure to limit the amount of plan loans permitted under the terms of the plan. The corrective action for defaulted loan failures remain the same as those provided under Rev. Proc. 2018-52. In this regard, however, the Department of Labor (DOL) has stated that it will provide a no-action letter under the DOL Voluntary Fiduciary Correction Program only for plan loan failures that are corrected under the Voluntary Compliance Program (and not for self-corrected loan failures).
The Rev. Proc. provides for eliminating the requirement to request a deemed distribution in the EPCRS Voluntary Compliance Program and allows plan sponsors the opportunity to obtain a spousal consent by following up with the participant and spouse. Also, a plan amendment can now be used to correct plan loans exceeding the number of loans permitted by the plan.
It is worth noting that Rev. Proc. 2018-52, which was effective Jan. 1, 2019, changed the method plan sponsors may use to make their correction submissions to the IRS. Beginning April 1, 2019, all Voluntary Correction Program submissions under EPCRS, including fee payments, are required to be made electronically on the www.pay.gov website, and the IRS will no longer accept paper submissions.
Ideally, employers seek to implement processes to avoid plan qualification failures where possible. However, even the best-intentioned employers make mistakes and should be aware of the appropriate correction programs procedures in place to minimize the negative tax consequences when errors occur.