A Brush Up on EPCRS’s Self-Correction Program: Reviewing updates made to EPCRS following the passage of SECURE 2.0
By Bill Ellis
With the enactment of the SECURE 2.0 Act, what are the parameters for a retirement plan to complete a correction under the IRS Employee Plans Compliance Resolution System (EPCRS)?
Original guidance for retirement plan corrections under the EPCRS was first laid out in Revenue Procedure 2021-30. With the passage of SECURE 2.0, interim guidance for plans to correct under EPCRS can now be found in IRS Notice 2023-43 and IRS Notice 2024-02.
What are some significant changes that SECURE 2.0 made to correcting plan failures under the Self-Correction Program (SCP)?
Plan sponsors may generally correct eligible inadvertent failures under the EPCR’s Self-Correction Program. Exceptions to this rule include failures in which the plan or plan sponsor is under examination by the IRS or for failures that have been identified by the plan or plan sponsor but have not been corrected within a reasonable period of time after identification. SECURE 2.0 also updated a plan sponsor’s ability to self correct significant failures that have been substantially completed before the plan or plan sponsor comes under investigation. Additionally, significant failures are no longer required to be corrected by the last day of the third plan year following the year in which the failure occurred. This provision greatly expands a plan sponsor’s ability to correct for significant failures through the Self-Correction Program.
As it relates to the Self-Correction Program, what is an “eligible inadvertent failure” and how will it be determined if a failure is corrected within a reasonable period of time?
IRS Notice 2023-43 and Section 305(e) of SECURE 2.0 define an eligible inadvertent failure as a failure that occurs despite the existence of suitable practices and procedures and that is not egregious, related to the diversion or misuse of plan assets, or related to an abusive tax avoidance transaction. Notice 2023-43 also states that the IRS will consider a failure that is corrected within 18 months after the failure is identified to have been corrected within a reasonable period of time.
Additionally, IRS Notice 2024-02, Q&A I-4, touches on the timeframe around employer contribution eligibility failures. It specifically states the following.
A corrective allocation of matching contributions that is made by the last day of the sixth month following the month in which correct elective deferrals begin (or, with respect to a terminated employee, would have begun but for the termination of employment) will be treated as having been made within a reasonable period.
Notice 2024-02 also provides guidance for plans with automatic contribution errors beginning on, or before, December 31, 2023. According to the Notice, “a corrective allocation of matching contributions made by the end of the third plan year following the year in which the error occurred will be treated as having been made within a reasonable period.”
In short, an eligible inadvertent failure is a failure in which the plan sponsor (to the best of its knowledge) is abiding by all regulatory guidelines and following its own internal administrative policies, and while doing so, accidently creates a failure. Once the failure has been identified, it is the plan sponsor’s responsibility to remedy the failure with corrective action by the end of the 18th month following the date the failure was identified. Further, if the plan sponsor is correcting for employer contribution eligibility failures, the plan sponsor will have until the end of the sixth month following the month in which correct deferrals began. Plan sponsors of automatic enrollment plans could have that time period extended to the end of the third plan year following the plan year in which the error occurred.
What is required to document a correction under the EPCRS’s Self-Correction Program?
The IRS places the responsibility of detailing the failure on the plan sponsor. In the event of a plan audit, the plan sponsor is expected to provide data specific to the timeframe in which the failure occurred. The plan sponsor must explain how the failure originated and the methods that were in place to avoid such a failure, the steps the plan sponsor took to correct the failure, and, finally, a summary of changes the plan sponsor made to its internal administrative policies to prevent a similar failure from occurring in the future.
Notice 2023-43 Q&A 11 provides further clarity on this topic detailing that a plan sponsor must provide the following items in order to correct under EPCRS’s Self-Correction Program.
Accordingly, if requested upon an examination, a plan sponsor must be able to provide documentation substantiating the self-correction, such as documentation that: (1) identifies the failure, including the years of occurrence, the number of employees affected, and the date the failure was identified; (2) explains how the failure occurred and demonstrates there were established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance that were in effect when the failure occurred; (3) identifies and substantiates the correction method and the date of the completion of the correction; and (4) identifies any changes made to those established practices and procedures to ensure that the same failure would not recur.
The IRS has indicated that further guidance expanding on changes to the EPCRS is expected. Therefore, the updates to the Self-Correction Program are subject to change.
