IRS Updates Employee Plans Compliance Resolution System (article)
IRS Updates Employee Plans Compliance Resolution System
Several years ago, the IRS established a program to provide qualified retirement plans a way to correct certain plan errors prior to discovery on audit. The program, known as the Employee Plans Compliance Resolution System (EPCRS), offers three programs for correcting plan errors; they are:
The IRS recently released two corrective procedures for plan errors - one relating to overpayment failures and the other relating to automatic contribution failures.
On March 27, 2015, the IRS issued Revenue Procedure 2015-27 modifying the EPCRS program. In particular, this pronouncement addresses overpayments. Generally, if a plan overpays a beneficiary, the plan is obligated to try to collect money back from the beneficiary. This has proven to be a challenge, particularly when there is no payroll from which to withhold the payment. According to this guidance, the plan can be made whole by a contribution, made by the plan sponsor, without obligating the plan to seek re-payment from the beneficiary.
Further, the guidance provides for reduced fees under the Voluntary Correction Program in two instances when specific criteria are met. Specifically, fees are reduced for plan sponsors who fail to timely make required minimum distributions. Reduced fees may also apply based on the number of participants with bad loans.
While the updated procedures in this guidance are generally effective on July 1, 2015, plan sponsors can begin to apply the modifications beginning March 27, 2015. Additional information about these procedures can be found on the IRS webpage, New Revenue Procedure Updates EPCRS.
Correcting automatic contribution and elective deferral failures in 401(k) and 403(b) Plans
In IRS Revenue Procedure 2015-28, presumably in an effort to encourage automatic contributions and correction of failures, the cost for correcting elective deferral failures is reduced in certain circumstances. This Revenue Procedure provides for three safe harbor methodologies for correcting plan errors.
With regard to correcting automatic contribution failures, if the problem is discovered and corrected promptly, i.e., the earlier of 9½ months following close of plan year, or the first payroll period following the month of the plan discovers the error, then no qualified non-elective contribution (QNEC) would be required. The plan sponsor would be required to make any corrective matching contributions as well as appropriate interest on the amount.
For other elective deferrals failures discovered within three months, no QNEC is required as long as correction is made by the first pay period following month of discovery. If the discovery occurs after 3 months but before the end of the second plan year, then a 25% (previously 50%) QNEC would be required.
In all methodologies, affected employees must be provided written notification (as outlined in Section 4 of the Revenue Procedure) of the corrected contribution or deferral amount within 45 days following the date of correction.
An employer or plan sponsor who believes that it may have an issue with elective deferral or contribution failures should review this guidance and proceed accordingly. Additional information about these procedures can be found on the IRS webpage, New Methods for Correcting Elective Deferral Errors. Reliance on this guidance can be followed immediately.
The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.