The IRS provided guidance in advance of an update to the Employee Plans Compliance Resolution System (EPCRS). The SECURE 2.0 Act of 2022 (P.L. 117-328, Sec. 305) allows more types of errors to be corrected under EPCRS (including plan loan errors) and allows custodians of individual retirement accounts or individual retirement annuities (IRAs) to self-correct inadvertent errors, effective December 29, 2022. The SECURE 2.0 Act further directs the IRS to update the current version of EPCRS in Rev. Proc. 2021-30 within 2 years. Under the interim guidance, plan sponsors may self-correct eligible inadvertent failures. However, IRA custodians may not self-correct before Rev. Proc. 2021-30 is updated.
Plan sponsors may rely on the interim guidance immediately, until the date that Rev. Proc. 2021-30 is updated. Self-corrections made after December 29, 2022, and prior to this guidance may apply a good faith interpretation of the SECURE 2.0 Act. The IRS requests comments on this guidance and other aspects of the SECURE 2.0 Act’s changes to EPCRS.
SECURE 2.0 Changes to EPCRS
Prior to the SECURE 2.0 Act changes, EPCRS allowed plan sponsors to self-correct insignificant operational failures at any time, but significant operational failures and plan document failures had to be corrected within 3 years of the failure. The SECURE 2.0 Act expanded self-correction to cover any failure to comply with the qualification rules unless the IRS identified the failure or the correction was not completed within a reasonable time after the failure was identified. Specifically, the SECURE 2.0 Act allows participant loan failures to be self-corrected using corrections that were available only under IRS-supervised programs.
The SECURE 2.0 Act also directs the IRS to allow IRA custodians to use EPCRS to self-correct IRA failures, including the failure to make a required minimum distribution and failed rollovers from inherited IRAs. The IRS must revise the EPCRS guidance in Rev. Proc. 2021-30 within 2 years of the date of enactment.
Guidance for Plan Sponsors
The interim guidance generally allows a plan sponsor to self-correct an eligible inadvertent failure before the EPCRS program as outlined in Rev. Proc. 2021-30 is updated if the failure is not identified by the IRS and the self-correction is completed within a reasonable period after the failure is identified. The failure may not be egregious, related to an abusive tax avoidance transaction, or related to the diversion of plan assets.
The IRS identified several provisions of Rev. Proc. 2021-30 that no longer apply to self-corrections under the SECURE 2.0 Act, including the requirements that the plan have a favorable determination letter, the correction must be completed before the plan is under examination, and significant failures must be completed within 3 years. In addition, plans may now self-correct demographic and employer eligibility failures, SEPs and SIMPLE IRA plans may correct significant failures, and certain loan failures can be self-corrected using methods that previously required IRS approval.
The IRS also set out a list errors that may not be corrected under the interim guidance. Even if the failure otherwise qualifies as an eligible inadvertent failure under the SECURE 2.0 Act, listed failures may not be corrected before Rev. Proc. 2021-30 is revised. These failures include a failure to initially adopt a written plan and significant failures in terminated plans.
““Reasonable Period” Clarified
The IRS discussed how to determine whether a self-correction has been made within a “reasonable period” after it is identified by the plan sponsor. Generally, a failure that has been corrected by the last day of the 18th month following the date the failure is identified by the plan sponsor will be treated as having been completed within a reasonable period after it is identified. However, an employer eligibility failure is deemed to be corrected within a reasonable period only if the plan sponsor ceases all contributions to the plan as soon as reasonably practicable after the failure is identified and no later than the last day of the 6th month following the date the failure is identified.
The IRS also provided that when a plan or plan sponsor comes under examination, the eligible inadvertent failure is treated as having been identified by the IRS and thus is not eligible for self-correction unless the plan sponsor has demonstrated a specific commitment to implement a self-correction before coming under examination. However, if the failure is “insignificant” as defined in Rev. Proc. 2021-30, the failure may be self-corrected even if the plan or plan sponsor is under examination.
Guidance for IRA Custodians
IRA custodians may not use the interim guidance to correct eligible inadvertent failures. The IRS provided that self-correction of IRA failures must wait until Rev. Proc. 2021-30 is revised.
