Retirement plan compliance is a top priority for employers. However, shifting regulations present challenges for plan sponsors when it comes to maintaining compliance and avoiding penalties. Nonetheless, sponsors have a fiduciary responsibility to adhere to current regulatory guidelines when it comes to administering workplace retirement plans.
A recent Employee Benefit News article spotlighted recent guidance from the IRS regarding corrections for retirement plan errors. With ever-evolving regulations, errors are commonplace. Plan sponsors can self-correct many retirement plan errors using the IRS’ Employee Plans Compliance Resolution System (EPCRS).
The IRS continues to modify the EPCRS, allowing employers to correct errors without IRS approval. The most recent changes have been implemented as a result of SECURE 2.0, passed in 2022. According to Employee Benefit News, “The legislation expands EPCRS to permit additional corrections without IRS approval, applying EPCRS to inadvertent IRA errors, exempting certain failures to make required minimum distributions from excise tax and requiring the IRS to update EPCRS on or before December 29, 2024.” The IRS issued interim guidance in May 2023. Plan sponsors should rely on this guidance until updates are made to EPCRS.
The interim guidance doesn’t address all of the forthcoming changes to the self-corrections allowed under SECURE 2.0. According to Employee Benefit News, some of these changes include:
- “Self-correction of eligible inadvertent failures: Prior to SECURE 2.0, insignificant failures could be corrected under SCP at any time and significant failures could be corrected under SCP if the correction was completed by the end of the third plan year during which the failure occurred. Under new guidance, certain “eligible inadvertent failures” may be corrected under SCP within a reasonable time after identifying the failure, generally 18 months after discovery (six months for employer eligibility failures).
- Self-correction while under IRS examination: Prior to SECURE 2.0, the ability to self-correct an error (thereby avoiding sanctions) once under IRS examination was extremely limited. The correction must have been substantially completed prior to coming under examination. Under SECURE 2.0 and Notice 2023-43, an insignificant failure (including an “eligible inadvertent failure”) may be corrected while under examination. An “eligible inadvertent failure” can be corrected while under examination if the plan sponsor demonstrated a specific commitment to implement self-correction. Notice 2023-43 provides that whether a failure is insignificant is determined based on the same principals set forth in EPCRS. While this appears to be a significant expansion of the rule, the IRS can take the position that even small errors are significant and challenge the ability to self-correct while under examination without sanctions.
- Expanded corrections: Certain plan loan failures and plan document failures, previously correctable only under VCP, may now be self-corrected if certain requirements are met. While not addressed in the interim guidance, SECURE 2.0 reduces the excise tax for missed RMDs and simplifies the rules for recovery of overpayments allowing, in certain cases, plan fiduciaries to choose not to recoup overpayments and permit rollovers of overpayments to remain valid.”
Although the new IRS guidance expands employers’ ability to “self-correct retirement plan errors,” plan sponsors and administrators should establish and maintain practices and procedures designed to promote compliance with the code requirements. They also should promptly correct errors in accordance with EPCRS principals swiftly upon discovery. Coordinating plan and operation reviews, identifying errors and implementing corrections can require time given that many parties are involved. The longer an error lingers, the greater likelihood that the costs of corrections and penalties increase. Not all errors can be self-corrected, and plan sponsors and administrators should ensure that EPCRS principals are followed, and corrections are documented in plan records.
