On May 8, 2023, I wrote how guidance was sorely needed on SECURE 2.0’s self-correction of eligible inadvertent failures. See Guidance Sorely Needed On SECURE 2.0 Self-Correction of Inadvertent Failures. On May 25, the IRS issued Notice 2023-43 (Notice) providing guidance in the form of questions and answers meant to provide taxpayers guidance in advance of an update to Rev. Proc. 2021-30 containing the current version of the Employee Plans Compliance Resolution System (EPCRS). However, while the Notice provides some answers, many questions remain, requiring more substantive guidance. The Notice provides answers to two of the questions I raised in my prior article regarding a specific commitment to implementing self-correction and what is a reasonable period to complete correction. The statute provides that self-correction of an eligible inadvertent failure is not available if such failure was identified by the Secretary of the Treasury prior to any actions which demonstrate a commitment to implement self-correction with respect to the failure or the self-correction is not completed within a reasonable period after discovery.
Specific Commitment. The Notice provides that prior to EPCRS being updated, a determination as to whether an employer’s actions demonstrate a specific commitment to implement the self-correction of an identified eligible inadvertent failure will be based on all the facts and circumstances. However, the actions must generally demonstrate that the employer is actively pursuing correction. The mere completion of an annual compliance audit or general statement of intent to correct failures when they are discovered are not actions demonstrating a specific commitment.
Under this guidance it appears the example given in my earlier article of the employer having identified that some employees were not automatically enrolled that is in the process of calculating the necessary correction amounts would be considered to have made a specific commitment.
Reasonable Period. The Notice provides that whether an eligible inadvertent failure is corrected within a reasonable period after being identified by the employer is also determined by considering all relevant facts and circumstances. It then provides a safe harbor by stating that a failure that is corrected within 18 months of being identified will be treated as having been completed within a reasonable period. For an employer eligibility failure where an employer adopts a plan that it is not eligible to adopt (e.g., a for-profit employer adopting a 403(b) plan) to be corrected within a reasonable period all contributions to the plan must cease as soon as reasonably practicable and in no event later than 6 months after the failure is identified.
Identification By The Secretary. Somewhat surprisingly the Notice provides that an eligible inadvertent failure is treated as having been identified by the Secretary when the plan or employer comes under examination. Thus, once the plan or employer comes under examination, the eligible inadvertent failure cannot be self-corrected unless prior to the examination, the employer has demonstrated a specific commitment to implement self-correction. The failure need not be specifically identified under the examination.
Eligible Inadvertent Failures That Can’t Be Self-Corrected. Interestingly, the Notice provides a list of eligible inadvertent failures that until EPCRS is updated may not be self-corrected. These include the failure to initially adopt a written plan document; failures in orphan plans; a significant failure in a terminated plan; certain demographic failures; excess contributions to a SEP or SIMPLE IRA permitting the contributions to stay in the Participant’s IRA; failures in SEPs or SIMPLE IRAs that do not use model or prototype forms; and a failure in an ESOP involving Code section 409.
EPCRS Provisions That Don’t Apply. The Notice also provides a list of provisions in the current version of EPCRS relating to self-correction that do not apply to self-correcting eligible inadvertent failures. These include: the requirement that a qualified plan or 403(b) plan have a favorable determination letter; the prohibition of self-correction of demographic failures and employer eligibility failures; the prohibition of self-correction for significant failures of SEPs or SIMPLE IRA plans; the prohibition of self-correction of certain loan failures; the provisions regarding self-correction of significant failures that have been substantially completed before the plan or employer are under examination; and the requirement that a significant failure must be completed or substantially completed by the end of the third plan year following the year in which it occurred.
Other Answers. The Notice clarifies that eligible inadvertent failures can be self-corrected before EPCRS is updated even if the failure occurred prior to enactment of SECURE 2.0. If the eligible failure involves an excise tax, self-correction does not automatically waive the excise tax. However, waiver of the tax can be sought through the EPCRS Voluntary Correction Program (VCP). Likewise, before EPCRS is updated, an employer may submit a VCP application to correct an eligible inadvertent failure. An eligible inadvertent failure of an IRA cannot be corrected under EPCRS before EPCRS is updated.
Conclusion. The Treasury Department and IRS are accepting comments on the Notice through August 23, 2023. While the Notice has provided some initial guidance, much more is needed. As previously raised, guidance on the parameters of the necessary practices and procedures that must be in place to even qualify the failure as an eligible inadvertent failure is critical. Additionally, the coordination between the existing Self Correction Program under EPCRS (SCP) and the self-correction of eligible inadvertent failures need to be explained. Generally, a significant operational failure may be self-corrected under the SCP by the end of the third year after its occurrence. However, the Notice says this requirement does not apply to eligible inadvertent failures before EPCRS is updated. This appears to mean that, at least for now, a significant eligible inadvertent failure can be self-corrected later than three years after it occurred. On the other hand, the Notice provides that generally to be self-corrected within a reasonable period after being identified, the eligible inadvertent failure should be corrected within 18 months of being identified. The SCP focuses on when the failure occurred while correcting eligible inadvertent failures focuses on when the failure was discovered or identified. It appears this means that if a significant eligible inadvertent failure first occurred 5 years ago but was not identified until July of 2023, if it were self-corrected by January 1, 2025, it would be timely corrected. At least, I think that is what the Notice says.