On July 16, 2021, the IRS released its updated Employee Plans Compliance Resolution System (EPCRS) by issuing Rev. Proc. 2021-30 setting forth the parameters of the program and replacing the former governing revenue procedure, Rev. Proc.  2019-19.  EPCRS is a comprehensive system under which employers can save the favorable tax treatment of retirement plans intended to be qualified retirement plans under Internal Revenue Code (Code) section 401(a), 403(b) plans, or SEP and SIMPLE IRAs when they have failed to meet the requirements of the Code either in operation or in their plan document.  Changes to EPCRS include: expansion of the Self-Correction Program (SCP); the elimination of anonymous Voluntary Correction Program (VCP) submissions, but creation of free anonymous pre-submission VCP conferences; as well as other changes.

EPCRS establishes three distinct programs for correcting operational and documentary failures of retirement plans, allowing a plan to be corrected and maintain tax-favored status under the Code despite an otherwise disqualifying error.  These programs are the SCP, the VCP, and Audit-CAP.   SCP allows employers to voluntarily self-correct certain failures without having to file with the IRS and obtaining its consent.  The VCP allows employers, whose plans are not under examination by the IRS, to voluntarily bring errors in plan documentation or operation to the attention of the IRS, pay a user fee based on the plan’s assets, propose a correction method, and receive a compliance statement from the IRS stating if the corrections are made within 150 days of the date of the statement, the IRS will not disqualify the plan because of the error.  The Audit-CAP program allows the employer whose plan has been audited by the IRS and found to include a disqualifying failure to pay a sanction amount, correct the failure, and keep the plan qualified for participant employees.

Expansion of SCP.  Under prior versions of EPCRS, insignificant operational failures could be self-corrected at any time while significant failures could only be self-corrected if the correction was completed by the end of the second plan year after the plan year in which the failure first occurred.  Rev. Proc. 2021-30 provides, effective July 16, 2021, the period for self-correcting significant operational failures is extended to the end of the third plan year after the plan year in which the failure occurred.  This is a welcomed change as it give employers longer to discover and self-correct any such failures without having to submit to the VCP and pay a user fee.  Additionally, EPCRS now makes it easier to self-correct operational failures through retroactive plan amendments effective July 16, 2021, by eliminating a confusing and difficult requirement that all participants in the plan (not just those affected by the failure) benefit from the retroactive amendment.

While these changes to the SCP are welcomed, notably there was no change to how one determines whether an operational failure is significant.  The new EPCRS still lists the 7 factors to consider and only provides examples of how to apply them.  This means that in close cases a VCP submission is the only way to ensure the IRS won’t challenge the correction.

Anonymous VCP Submissions.  Under Rev. Proc. 2021-30, effective January 1, 2022, the ability to file an anonymous VCP submission is eliminated.  Currently, employers’ representatives can file under VCP without disclosing their identity until the IRS agrees the failures can be corrected under VCP.  This was very useful when the nature of the failures were such that it was unclear if they qualified or whether the employer’s proposed correction was acceptable.  Encouraging though is the creation of the anonymous pre-submission conference beginning next January.  Under this procedure, employers’ representatives can request a conference with the IRS to discuss a potential VCP submission without disclosing the identity of the employer or paying a user fee.  Failures for which there are safe harbor corrections described in EPCRS are not eligible.  The conferences are at the discretion of the IRS and, if granted, the IRS will provide advisory oral feedback that is not binding.  After the conference, if the employer wishes to file a VCP submission, it cannot be anonymous and the user fee must be paid.

Employers currently considering anonymous VCP submissions should consider whether they want to file before January 1, 2022, or file for a pre-submission conference in 2022, or just forgo filing anonymously.

Other Changes. Rev. Proc. 2021-30 contains other changes as well.  Effective July 16, 2021, it expands to defined benefit plans correction principles previously applicable only to defined contribution plans regarding overpayments to participants or beneficiaries.  Defined benefit plans may now be corrected without requiring the recipient to re-pay the plan by reducing future payments.  Under certain circumstances, the employer need not re-pay the plan either.

Rev. Proc. 2021-30 also extends a safe harbor correction method for missed elective deferrals for automatic enrollment contributions in a 401(k) or 403(b) plan.  The safe harbor provides that no QNEC is required for the missed deferral, provided correct deferrals begin within a certain time.  Matching contributions that would have been made had the missed deferrals been made must still be made, with earnings. The safe harbor sunset as of December 31, 2020 but is now extended through December 31, 2023.

Rev. Proc. 2021-30 also increases the dollar amount considered de minimis and not requiring correction for certain overpayments to a participant or excess amounts contributed on behalf of a participant from $100 to $250.  This change is effective July 16, 2021.

Conclusion.  EPCRS is a very beneficial program for keeping the favorable tax treatment of retirement plans when the plan has experienced a failure to comply with the Code.  The IRS continues to try to improve the program every couple of years with a new revenue procedure.  Employers who are aware of disqualifying failures in their plan should consult with legal counsel to see what Rev. Proc. 2021-30 means for their plans.