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CCH® PENSION — 8/25/08

IRS Updates Its Employee Plans Compliance Resolution System

From Spencer's Benefits Reports: In Rev. Proc. 2008-50, the Internal Revenue Service updates its Employee Plans Compliance Resolution System (EPCRS), which is the agency’s comprehensive system of voluntary correction programs for sponsors of qualified retirement plans. The revenue procedure supersedes Rev. Proc. 2006-27, C.B. 2006-1, 945.

There are three different programs available under the EPCRS: (1) the Self-Correction Program (SCP), which permits a plan sponsor to correct operational failures without obtaining IRS approval or paying a fee; (2) the Voluntary Correction Program (VCP), under which a plan sponsor may correct plan document, operational, demographic, or employer eligibility failures, pay a limited correction fee, and receive IRS approval; and (3) the Audit Closing Agreement Program (Audit CAP), under which a plan sponsor may correct plan document, operational, demographic, or employer eligibility failures identified on audit and enter into a closing agreement with the IRS with regard to the sanction imposed by the agency.

The IRS originally established the EPCRS in Rev. Proc. 98-22, C.B. 1998-1, 723, which consolidated the separate voluntary compliance programs and set forth standardized correction methods for certain specific operational failures. The agency has periodically updated and expanded the EPCRS in subsequent revenue procedures.

Changes To The Program

Rev. Proc. 2008-50 makes numerous changes to the EPCRS, including the following measures:

  • expands the definition of a plan loan failure to include violations of IRC Sec. 72(p)(2), regardless of whether the plan contains language relating to Sec. 72(p);
  • clarifies that in particular cases the IRS may decline to make available one or more correction programs under EPCRS in the interest of sound tax administration;
  • expands the scope of the SCP by (1) liberalizing the requirements for determining whether there was substantial completion of correction as of the first date the plan or plan sponsor is considered to be under examination, and (2) expanding the failures for which sample correction methods are provided;
  • expands the correction method with respect to elective deferrals to include catch-up contributions under IRC Sec. 414(v) and plans that provide the opportunity for an employee to designate all or a portion of elective deferrals as designated Roth contributions;
  • expands the correction method for a failure to include an eligible employee in a 401(k) plan to include a situation in which elective deferral and after-tax employee contribution elections are not implemented by the employer or are implemented in a manner inconsistent with the plan’s terms;
  • clarifies the scope of a compliance statement issued when correcting certain qualification failures by plan amendment;
  • adds a factor to be considered in the determination of whether a correction method is reasonable and appropriate, this new factor requires consideration of corrections of violations that are similar to the failure being addressed by other government agencies;
  • clarifies that the earnings adjustment for corrective contributions or distributions is calculated from the date when the qualification failure occurred without regard to any extensions provided under the Tax Code;
  • clarifies that the earnings rate derived from the Department of Labor’s Voluntary Fiduciary Correction Program online calculator may be used to determine the earnings adjustment applied to corrective contributions, distributions, allocations, and reallocations if it is not feasible to make a reasonable estimate of what the actual investment results would have been;
  • provides that if the total corrective distribution due a participant or beneficiary is $75 or less, the plan sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution;
  • clarifies the treatment of amounts improperly distributed to participants and beneficiaries under the plan that are rolled over to individual retirement accounts, with respect to the excise tax under IRC Sec. 4973;
  • reduces the compliance fee under certain circumstances for a plan where the sole failure is the failure of participant loans to comply with the requirements of Sec. 72(p)(2); and
  • provides a sample application form for VCP filings.

    • In Rev. Proc. 2008-50, the IRS states, “It is expected that the EPCRS revenue procedure will continue to be updated from time to time, including further improvements to EPCRS based on comments previously received. Thus, the Service and Treasury continue to invite further comments on how to improve EPCRS.” Specifically, the agencies request comments on how the EPCRS might be modified to address issues relating to automatic enrollment in 401(k) plans and designated Roth contributions to 401(k) plans. Comments should be submitted to the IRS, Attention: SE:T:EP:RA:VC, 1111 Constitution Avenue, N.W., Washington, DC 20224.

    Rev. Proc. 2008-50 generally is effective Jan. 1, 2009. However, plan sponsors may apply the provisions of the revenue procedure on or after Sept. 2, 2008. For further information, contact Avaneesh Bhagat or Maxine Terry via e-mail at RetirementPlanQuestions@irs.gov.

     

    For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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