IRS Expands Self-Correction Program

In a major victory for the advocacy efforts of the American Retirement Association, the IRS has expanded its Employee Plans Compliance Resolution System (EPRCS) self-correction program (SCP).

The American Retirement Association (ARA) on April 4, 2018 had submitted a comment letter to the IRS to recommend modifications to EPCRS that would expand the use of the SCP and reduce the burden imposed on small business plans by the new pricing structure that the IRS had put in place for the Voluntary Compliance Program (VCP).  While not all the ARA recommendations in the April 4, 2018 comment letter were adopted, Rev. Proc. 2019-19 is a great start to help plan sponsors and practitioners more efficiently address potential compliance issues.

Craig Hoffman, formerly General Counsel for the American Retirement Association, now with the law firm of Trucker Huss, who led ARA’s advocacy on the issues here, noted “This is a big win for retirement plan practitioners and plan sponsors alike. The ability to use the expanded SCP will be particularly beneficial to the sponsors of smaller plans who will, as a result, now be able to correct a broader array of mistakes without having to actually file with the IRS and pay a user fee.  This result is a testament to the hard work of the Government Affairs Committee at ARA over an extended period, and the willingness of the staff at the IRS to take those perspectives into account.” 

The newly announced expansion allows the SCP to be used to resolve certain plan document failures, creates additional correction options, makes it possible for there to be relief from deemed distributions associated with specified failures involving plan loans made to participants and provides additional opportunities for correcting certain operational failures by plan amendment.

The changes, contained in Revenue Procedure (Rev. Proc.) 2019-19, update the comprehensive system of correction programs for sponsors of retirement plans that have not satisfied the requirements of Internal Revenue Code Sections 401(a), 403(a), 403(b), 408(k) and or 408(p) for  a period of time. The IRS issued Rev. Proc. 2019-19 on April 19; it became effective on that date, and supercedes Rev. Proc. 2018-52.

Changes Made

The update that Rev. Proc. 2019-19 makes is a limited update and primarily expands the application of the SCP to permit correction of certain plan document failures and specific plan loan failures, as well as to provide an additional method of correcting operational failures by plan amendment under the SCP.

The changes Rev. Proc. 2019-19 makes include:

New rules for correcting by plan amendment under SCP. Rev. Proc. 2019-19 adds new rules for correcting operational failures by plan amendment under the SCP. Now such failures may be corrected by plan amendment under the SCP if three conditions are satisfied:

1. the plan amendment would result in an increase of a benefit, right, or feature;
2. the increase in the benefit, right or feature is available to all eligible employees; and
3. providing the increase in the benefit, right or feature is permitted under the Internal Revenue Code and satisfies the correction principles of section 6.02 Rev. Proc. 2018-52.

SCP is now available to correct certain plan loan failures. Rev. Proc. 2019-19 permits certain plan loan failures to be corrected under the SCP. The revenue procedure also provides that errors relating to the failure to repay a plan loan according to plan terms (a defaulted loan) may be corrected under the SCP. The correction methods for a defaulted loan are the same as those provided under Rev. Proc. 2018-52; namely, permitting correction by either a single-sum repayment, re-amortization of the outstanding loan balance, or a combination of the two.

Reporting of deemed distributions. Section 6.07(2) of Rev. Proc. 2019-19 eliminates the requirement that reporting relief must be requested in order to report the deemed distribution in the year of correction.

Plan loan statutory failures. Section 6.07(3)(b) and (c) provides that failures related to: (1) plan loans that are made in excess of the loan limits under Internal Revenue Code Section 72(p)(2)(A), or (2) plan terms that do not meet the requirements of Code Section 72(p)(2)(B) or (C), may be corrected only under VCP or Audit CAP.

Failure to obtain spousal consent for a plan loan. Section 6.07(4) of Rev. proc. 2019-19 provides a new correction method for failure to obtain spousal consent for a plan loan. Under the new correction method, the plan sponsor must notify the affected participant and spouse, so that the spouse can provide spousal consent. If spousal consent is not obtained, section 6.07(4)(b) provides that the failure must be corrected using either VCP or Audit CAP.

Expanding SCP to correct certain plan loan failures by plan amendment. Section 6.07(5) provides that a plan sponsor may correct a failure resulting from granting a number of plan loans that exceeds the number of loans permitted under a plan. It may do so by adopting a plan amendment in accordance with the correction by plan amendment methods set forth in section 2.07(3) of Appendix B.

New section 2.07(3) of Appendix B adds a new correction method for plan loans when the number of plan loans exceeds the number permitted under the plan, in addition to the current correction method relating to the failure of granting plan loans to a participant under a plan that does not permit plan loans. Under section 2.07(3) of Appendix B, the plan sponsor may correct by plan amendment if:

1. the amendment satisfies Code Section 401(a);
2. the plan as amended would have satisfied the qualification requirements of Code Section 401(a) (and the requirements applicable to plan loans under Code Section 72(p)) had the amendment been adopted and effective when plan loans were first made available; and
3. plan loans (including plan loans that exceed the number permitted under the terms of the plan) were available to either all participants, or solely to one or more participants who were non-highly compensated employees.

Modifications

Modifications that Rev. Proc. 2019-19 makes to Rev. Proc. 2018-52 include the following:

• Revising section 1.03 to reflect that SCP is available to correct certain plan document failures, and to make other modifications.
• Revising section 4.01 to provide that SCP is also available to correct certain plan document failures and certain plan loan failures.
• Revising section 4.03(1) to provide that certain plan document failures may be corrected under SCP if, as of the date of the correction, the plan is subject to a favorable letter and other applicable requirements are met.
• Revising section 4.04 to reflect that SCP is available to correct certain plan document failures and to make other modifications.
• Revising section 4.05(2) to add a new method to correct by plan amendment under SCP.
• Revising sections 4.10(2) and 4.12 to reflect that SCP is available to correct certain plan document failures and to make other modifications.
• Revising section 6.02(6) to reflect changes to the methods for correction of plan loan failures.
• Revising section 6.04 to provide that, in addition to VCP, failures to obtain spousal consent may also be corrected under SCP or Audit CAP.
• Revising section 6.07 to reflect changes to methods for correction of plan loan failures, including expanding SCP to correct certain plan loan failures, permitting the reporting of deemed distributions in the year of correction without an advance request of relief, and adding new correction methods for certain plan loan failures.
• Revising sections 7 and 9 to reflect changes to SCP.

Revising section 8 to reflect that additional examples illustrating whether an operational failure is insignificant will be made available on the IRS website.

Revising section 2.07 of Appendix B to provide a new correction method when the number of plan loans exceeds the number permitted under the plan.