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IRS Issues Guidance on Expansion of EPCRS

The IRS has issued guidance on the expansion of the Employee Plans Compliance Resolution System (EPCRS) under Section 305 of SECURE 2.0. 

The guidance is contained in Notice 2023-43, which provides interim guidance in advance of an update to Revenue Procedure (Rev. Proc.) 2021-30

The issues the notice addresses include that:

  • a plan sponsor may self-correct an eligible inadvertent failure before Rev. Proc. 2021-30 is updated if certain conditions are satisfied and certain exceptions do not apply;
  • a custodian of an IRA or an individual retirement annuity may not correct an eligible inadvertent failure under EPCRS before Rev. Proc. 2021-30 is updated; and
  • interim interpretive guidance that applies regarding corrections of eligible inadvertent failures.

Section 305 of SECURE 2.0

Section 305 expands the Self-Correction Program under EPCRS and requires that Rev. Proc. 2021-30 be revised to take into account the provisions of Section 305 no later than two years after the date of enactment of SECURE 2.0. The notice provides guidance in the form of questions and answers regarding Section 305.  

Rev. Proc. 2021-30

Rev. Proc. 2021-30 sets forth EPCRS, a system of correction programs for sponsors of qualified plans, 403(b) plans, SEPs, and SIMPLE IRA plans that have failed to satisfy the requirements of Internal Revenue Code Sections 401(a), 403(a), 403(b), 408(k), or 408(p).

Rev. Proc. 2021-30 also provides that, under the EPCRS self-correction program (SCP), a plan sponsor of a qualified plan or a 403(b) plan generally may self-correct certain significant operational failures and plan document failures by the last day of the third plan year following the plan year for which the failure occurred and may correct certain insignificant plan failures even if they are discovered on examination. However, certain failures (such as certain plan document failures, certain loan failures, employer eligibility failures, and demographic failures) are ineligible for correction under SCP.

The Guidance 

Notice 2023-43 says that the following are the case before Rev. Proc. 2021-30 is updated. 

  • A plan sponsor may self-correct an eligible inadvertent failure, including one related to a loan from a plan to a participant that is corrected in accordance with Section 6.07 of Rev. Proc. 2021-30, if the following conditions are satisfied: 

1. The failure was not identified by the Treasury Secretary before any actions demonstrating a specific commitment to implement a self-correction regarding the failure. 
2. The self-correction is completed within a reasonable period after the failure was identified.
3. The failure is not egregious, does not relate to (1) an abusive tax avoidance transaction, and (2) the diversion or misuse of plan assets. 
4. The self-correction satisfies all of the provisions applicable to self-correction set forth in Rev. Proc. 2021-30.

  • A plan sponsor may not self-correct the following eligible inadvertent failures: 

1. A failure to initially adopt a written plan under Code Sections 401(a), 403(a), 403(b), 408(k), or 408(p), including the failure to adopt a written section 403(b) plan timely to meet the requirements of the final regulations under section 403(b). 
2. A failure in an orphan plan. 
3. A significant failure in a terminated plan. 
4. A failure that involves excess contributions to a SEP or SIMPLE IRA plan and that is corrected by permitting the excess contributions to remain in an affected participant’s IRA. 
5. A demographic failure that is corrected using a method other than one set forth in Treas. Reg. §1.401(a)(4)-11(g). 
6. An operational failure corrected by a plan amendment that conforms the terms of the plan to the plan’s prior operations in a manner that is less favorable for a participant or beneficiary than the original terms of the plan. 
7. A failure occurring in a SEP with a plan document that does not consist of either (a) a valid Model Form 5305-SEP or 5305A-SEP adopted by an employer in accordance with the instructions on the applicable form, or (b) a prototype SEP that has a current favorable opinion letter and that has been amended in accordance with the procedures set forth in Rev. Proc. 2002-10, 2002-1 CB 401. 
8. A failure occurring in a SIMPLE IRA plan with a plan document that does not consist of either (a) a model Form 5305-SIMPLE or 5304-SIMPLE adopted by the plan sponsor in accordance with the instructions on the applicable form, or (b) a prototype SIMPLE IRA plan that has a current favorable opinion letter and that has been amended in accordance with the procedures set forth in Rev. Proc. 2002-10. 
9. A failure in an ESOP that involves Section 409, in which tax consequences other than plan disqualification are associated with the failure.

  • The following provisions of Rev. Proc. 2021-30 relating to self-correction do not apply regarding a self-correction of an eligible inadvertent failure: 

1. The requirement that a qualified plan or 403(b) plan be the subject of a favorable letter, as defined in Sections 5.01(4) and 5.02(5), respectively. 
2. The prohibition of self-correction of demographic failures and employer eligibility failures, as set forth in Section 4.06. 
3. The prohibition of self-correction of significant failures under SEPs and SIMPLE IRA plans, as set forth in Section 4.01(c). 
4. The prohibition of self-correction of certain loan failures, as set forth in Section 6.07. 
5. The provisions relating to self-correction of significant failures that have been substantially completed before the plan or plan sponsor is under examination, as set forth in Sections 4.02(2) and 9.02(3). 
6. The requirement set forth in Section 9 that a significant failure must be completed or substantially completed by the end of a specified correction period (in general, the last day of the third plan year following the plan year for which the failure occurred).

  • An eligible inadvertent failure is treated as having been identified by the Secretary when the plan or plan sponsor comes under examination. Accordingly, once the plan or plan sponsor comes under examination, the eligible inadvertent failure is no longer eligible for self-correction unless the plan sponsor has—before it or the plan comes under examination—demonstrated a specific commitment to implement a self-correction regarding the failure. 
  • A plan sponsor may self-correct a failure (including an eligible inadvertent failure) that is insignificant under Section 8.02 of Rev. Proc. 2021-30, even if the plan or its sponsor is under examination, and even if the failure is discovered on examination.
  • A determination as to whether actions taken by a plan sponsor demonstrate a specific commitment to implement the self-correction of an identified eligible inadvertent failure will be made based on all the facts and circumstances. However, these actions must generally demonstrate that the plan sponsor is actively pursuing correction of the specific identified failure. Just completing an annual compliance audit or adopting a general statement of intent to correct failures when they are discovered do not demonstrate a specific commitment to implement the self-correction of an identified failure.
  • In ascertaining whether the self-correction of an eligible inadvertent failure has been completed within a reasonable period after it is identified by the plan sponsor, a reasonable period is determined by considering all relevant facts and circumstances. Except regarding an employer eligibility failure, a failure that has been corrected by the last day of the 18th month following the date the plan sponsor identifies a failure will be treated as having been completed within a reasonable period after it is identified. A self-correction of an eligible inadvertent failure that is an employer eligibility failure will be treated as having been corrected within a reasonable period after it is identified by the plan sponsor only if the plan sponsor ceases all contributions to the plan as soon as reasonably practicable after the failure is identified and not later than the last day of the 6th month following the date the failure is identified.
  • A plan sponsor is not prevented from self-correcting an eligible inadvertent failure on or after Dec. 29, 2022, merely because it occurred before that date.
  • Self-correction of an eligible inadvertent failure regarding which an excise tax or additional tax applies will not automatically result in a waiver of the tax.
  • A plan sponsor may submit a voluntary correction program (VCP) application under Rev. Proc. 2021-30 to correct an eligible inadvertent failure, including one that is a loan failure.
  • Section 305 of SECURE 2.0 does not impose any new IRS recordkeeping requirements regarding self-correction of an eligible inadvertent failure.
  • An IRA custodian may not correct an eligible inadvertent failure under EPCRS before Rev. Proc. 2021-30 is updated.

Comments Requested

The Treasury Department and the IRS invite comments on Notice 2023-43 and any other aspect of Section 305 of SECURE 2.0. They are especially interested in comments relating to: 

  • additional correction methods that are required to be used to correct eligible inadvertent failures, including general principles of correction if a specific correction method is not specified by the Treasury Secretary; and 
  • a description of common IRA failures and suggested correction methods for them, and the possibility of expanding EPCRS to be available for IRA custodians and owners.

Comments should be submitted in writing on or before August 23, 2023, and should include a reference to Notice 2023-43. 

Comments may be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov (type “IRS Notice 2023-43” in the search field on the Regulations.gov home page to find this notice and submit comments). 

Comments also may be submitted by mail to: 

Internal Revenue Service 
Attn: CC:PA:LPD:PR (Notice 2023-43)
Room 5203 
P.O. Box 7604 
Ben Franklin Station 
Washington, D.C. 20044

Publication

Notice 2023-43 will be published in Internal Revenue Bulletin (IRB) 2023-24 on June 12, 2023.