The Revenue Procedure modifies EPCRS to align the correction procedures with recent changes to the determination letter program for individually designed tax-qualified plans; incorporates changes made to EPCRS in prior revenue procedures (2015-27, 2015-28, and 2016-8); revises the fee schedule provisions in EPCRS; and makes additional modifications and clarifications.
The Revenue Procedure is effective January 1, 2017, and plan sponsors may not elect to apply the provisions prior to such date.
Highlights of EPCRS Changes
Self-Correction Program (SCP)
- For individually designed tax-qualified plans, a “current” favorable determination letter is no longer required in order for the plan to be eligible to self-correct significant operational failures under SCP. Rather, the plan document requirement for SCP eligibility is satisfied if an individually designed tax-qualified plan has received a favorable determination letter at some point in its history.
- Plan sponsors are no longer required or permitted to submit determination letter applications in connection with correcting failures by plan amendment under SCP.
Voluntary Correction Program (VCP)
- Plan sponsors are no longer required or permitted to submit determination letter applications in connection with correcting failures by plan amendment through a VCP submission.
- The IRS clarified that the issuance of a compliance statement for a VCP submission that involves correction of a plan document failure or an operational failure through plan amendment does not constitute a determination that the terms of the plan (including the terms of the corrective amendment) satisfy the tax qualification requirements in form.
- Unlike SCP, VCP is available to correct egregious failures (e.g., a plan that consistently and improperly covers only highly compensated employees). In the Revenue Procedure, the IRS reserves the right to impose a sanction that may be higher than the applicable VCP user fee when an egregious failure is involved, including any case in which: (i) the parties controlling a plan recognized that taking a certain action would cause a failure to occur; and (ii) the failure involved either a substantial number of participants or beneficiaries, or participants who are predominantly highly compensated employees. Previously, the applicable VCP user fee applied to egregious failures, and EPCRS did not grant the IRS discretion to increase sanctions.
- After 2016, VCP user fees are determined under the annual Employee Plans user fee revenue procedure. The user fee for a terminating orphan plan may be waived at the discretion of the IRS if requested at the time of the VCP submission.
Audit Cap Program (Audit Cap)
- The approach for determining Audit Cap sanctions has been revised. Auditors must review facts and circumstances in determining the sanction amount, and as a general rule the sanction amount will not be less than the applicable VCP fee amount. The Revenue Procedure lists several factors to be taken into account to determine an appropriate sanction amount, with additional factors to be taken into account when a nonamender failure is discovered by the IRS while a plan is under examination.
Previously, the sanction amount was a negotiated percentage of the maximum payment amount. Generally, the maximum payment amount is a monetary amount that is approximately equal to the tax the IRS could collect upon plan disqualification. Under the Revenue Procedure, the maximum payment amount is only one factor the IRS considers when determining the sanction amount.
- The determination of the sanction amount for nonamender failures discovered during the determination letter application process has been significantly modified. The sanction amount determination now involves a percentage of the applicable VCP user fee, which varies based on when the amendment was required to be adopted in relation to the plan’s remedial amendment cycle.
A flat fee of $750 now applies if the sole failure discovered during the determination letter application process is the failure to timely adopt an amendment upon which a favorable determination letter was conditioned, as long as the amendment was adopted within three months of the expiration of the applicable remedial amendment period.
Drinker Biddle Note: Consistent with the recent changes to the determination letter program, the changes to SCP, VCP and Audit Cap require plan sponsors to closely monitor plan document and operational compliance in order to expeditiously correct any failures under the optimal correction method.
No Partial Refunds for Anonymous Submission
- A disagreement over the correction process for an anonymous submission will no longer result in a refund of half the paid user fee.
Incorporating Changes Made by Revenue Procedures 2015-27, 2015-28, and 2016-8
- Changes previously made to EPCRS to (i) provide for flexibility in correcting overpayment errors, (ii) add a safe harbor correction method for certain employee elective deferral failures involving automatic contribution features, (iii) add safe harbor correction methods for certain employee elective deferral failures that are corrected within specified timeframes, and (iv) make various additional revisions and clarifications are now incorporated into EPCRS in this Revenue Procedure.
Correction Methods in Appendix A
- The Revenue Procedure clarifies that a plan sponsor may choose any correction method in the appendices to correct a failure, provided that the plan satisfies the eligibility requirements for such method.
If you have any questions about this Client Alert, please contact either author or your Drinker Biddle contact.