This article originally ran on April 9, 2015.
By Michael Webb, TGPC, AIF™, CEBS
On March 27, 2015, The IRS released Revenue Procedure (Rev. Proc.) 2015-27, which updates the Employee Plans Compliance Resolution System (EPCRS), found in Rev. Proc. 2013-12. EPCRS is the formal guidance that the IRS provides regarding correction of plan defects, and it is updated from time to time. This particular update can have some significant impacts on qualified plans, such as 401(k) and defined benefit plans. But what is the impact on 403(b)/457(b) plan sponsors and those who advise them? The purpose of this article is to examine the changes to EPCRS to determine their specific impact (or lack thereof) on 403(b)/457(b) plan sponsors.
Before we commence a discussion of the particular provisions of the EPCRS update, we should address the degree to which EPCRS applies to 403(b) and 457(b) plans. It is important to understand that the latest revisions do not change this applicability. EPCRS applies to 403(b) plans in a similar fashion to qualified plans, with some variations.
Technically, EPCRS does not apply to 457(b) plans at all! However, the last revision of EPCRS before the current update opened the door to governmental 457(b) plan submissions to the IRS outside of the EPCRS program on a provisional basis, utilizing standards that are similar to EPCRS. The door to private tax-exempt 457(b) plans, however, remains closed and no such submissions are permitted at all.
The first area updated in EPCRS addresses plan overpayments. An overpayment happens when a plan participant/beneficiary erroneously receives a benefit that is larger than the benefit to which he/she is entitled.
This occurs fairly regularly in defined benefit plans, in which benefit calculations are complex and often performed incorrectly. In defined contribution plans, in which individual account balances exist, such as 403(b) and 457(b) plans, overpayments should be a rare event. However, I have seen instances in which incorrect allocations were made to a participant account (another potential plan defect), which then resulted in an overpayment to a plan participant. This update to EPCRS would be applicable to these relatively rare instances of overpayments for 403(b)/457(b) plans.
The correction method for a plan overpayment centers on a request for the plan participant to restore the overpaid amounts to the plan. Such a request process is often awkward and unproductive, since, in the vast majority of cases, the participant does not have the financial means to pay back the overpayment to the plan, even if the participant wanted to. The revisions to EPCRS add some flexibility to this guidance, making it more practical for the employer or another person (presumably a third party such as the plan record keeper, if it were responsible for the error) to restore the overpayment to the plan. This is the one section of the EPCRS update where the IRS stated that it is contemplating further revisions; it is requesting comments on this issue.
Another EPCRS update is related to 415(c) failures which are total annual additions (employer contributions/employee contributions/forfeitures) that exceed the lesser of 100% of compensation or $53,000 (indexed) in 2015 that are uncorrected in multiple years. This defect is inapplicable to 457(b) plans, but is more common in 403(b)s than the overpayment failures previously mentioned, especially in plans of private tax-exempts with generous employer contributions and a more highly compensated workforce, where the $53,000 dollar limit can be exceeded.
The change involves the ability to self-correct such defects under the IRS’ Self Correction Program (SCP), rather than having to make a formal submission to the IRS, which is far more cumbersome. Previously, if defects were discovered in multiple years (as is often the case if the plan’s operating system is not sufficiently automated to prevent such defects), the plan was disqualified from using self-correction, since the plan would have been deemed not to have established practices and procedures to prevents such defect from recurring, as is required under SCP. Under the revision to EPCRS, such recurring defects would indeed be eligible for self-correction, so long as the defects were corrected within 9½ months after the close of the limitation years in question.
As alluded to above, some defects, unfortunately, cannot be self-corrected, and a formal submission must be made to the IRS. Unless the plan is under examination, this submission is completed via the IRS’ Voluntary Correction Program. Unfortunately, in addition to the administrative burden related to a formal submission, the program can be quite expensive as well — up the $25,000 for large plans. And the fee structure is especially problematic for 403(b) plans, as the size of the fee is determined by participant count — which, due to universal availability rules, generally includes all employees of a 403(b) plan sponsor — whether or not they actually participate in the plan
Thus, the EPCRS updates could be quite significant to 403(b) plan sponsors with qualifying defects. Such defects are required minimum distribution failures and loan failures, which are common failures in 403(b) plans. For minimum distribution failures, the fee is reduced to $1,500 if the number of participants affected is under 300, and only $500 if under 150. For submissions involving loan failures, as long at the failures do not affect more than 25% of plan participants (an unlikely scenario), the fee is anywhere from $300 to $3,000, depending on the number of participants affected. Both fee revisions will be welcome changes for 403(b) plan sponsors.
The other updates to EPCRS either have no applicability to 403(b)/457(b) plans (e.g. the changes related to determination letter programs, since such programs have only been established for qualified plans), or are quite minor (e.g. elimination of the reference to the Social Security letter forwarding program, since that program no longer exists). For more details on these changes, click on the link to the Revenue Procedure provided above.
Though most of the EPCRS update is of limited significance to 403(b)/457(b) plan sponsors and those who work with them, for those 403(b) employers who were considering the use of VCP for minimum required distribution or loan defects, the update would likely have a significant financial impact.
Practice Pointer: In addition to mastering the EPCRS updates, advisors may wish to consider a comprehensive review of the entire EPCRS procedure (also linked above). Knowledge is power!
Michael Webb, TGPC, AIF™, CEBS, chairs the NTSA Communications Committee and is Vice President at Cammack Retirement.
Cammack Retirement is an independent retirement plan consulting firm specializing in non-profit industries. Offering tailored, actionable solutions, to help clients achieve the greatest return on their employee investment, Cammack Retirement delivers end-to-end solutions for complex retirement plan challenges.
Please note that this article is for general informational purposes only, is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.