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The IRS expands guidance for corrections of qualified employee plans

On Behalf of | Sep 14, 2021 | Firm News |

The Internal Revenue Service has updated its’ Employee Plans Compliance Resolution System (EPCRS) that allows plan sponsors to correct overpayments and certain plan failures. As of July 16, the sponsor no longer needs to file a Voluntary Compliance Program (VCP) application unless directed otherwise. Other highlights among the details include:

Flexibility for overpayments

It is often proven difficult and frustrating to recoup or correct overpayment for both sponsors and recipients. Changes include:

  • The amount required to correct an overpayment went from $100 to $250.
  • Plan sponsors may now allow recipients to repay through installment, which is new, or a single sum.
  •  Plan sponsors can also correct overpayments to reduce repayment amounts.

Anonymous VCP to end in 2022

Plan sponsors formerly could make an anonymous submission to seek IRS approval of corrections of complex issues. Starting January 1, the IRS will require identifying information, including all applicable forms, documents and exhibits for VCP submissions. However, a representative can request a free pre-submission conference with the IRS to discuss eligibility. The representative must provide certain required information as outlined on Form 8950. The IRS will then determine whether it will hold the conference.

Self-correction period extended

Plan sponsors will have three plan years instead of the previous two to self-correct significant plan document and operation errors using the Self-Correction Program. It means that broader eligibility for plan sponsors to fix the issues related to elective deferrals between three months and three years.

Retroactive plan amendment now easier

Sponsors can correct operational failure through retroactive plan amendment that conforms with specific circumstances:

  • The amendment increased benefits.
  • The increased benefits comply with the EPCRS.

They will no longer require that a change needed to apply to all eligible participants.

Safe harbor self-correction extended

The IRS extended this from December 31, 2020, to December 31, 2023. It applies to automatic contributions to 401(k) plans.

Changes will continue

Beneficiaries and plan sponsors will continue to see changes to EPCRS that reduce costs and complexity. However, the specifics of each situation and the amount involved will likely still require outside guidance by tax compliance and tax law advisors.