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ARA Recommends Improvements to EPCRS

Advocacy

The American Retirement Association has suggested numerous improvements to the Employee Plans Compliance Resolution System (EPCRS). 

In an Oct. 14, 2021 comment letter responding to an IRS request (in Revenue Procedure 2021-30) for comments on improving the EPCRS program, the ARA thanked the IRS for its continuous improvement and expansion of EPCRS—in particular, the most recent expansion of the self-correction program (SCP) under EPCRS in Rev. Proc. 2021-30. 

The ARA also recommends further improvements to EPCRS, including the following. 

  • Revise the provisions regarding self-correction by retroactive amendment to: 
    • permit retroactive correction by plan amendment for the failure of a participating (related) employer to adopt the plan; and 
    • clarify what is meant by the requirement to increase a “benefit, right, or feature” with respect to permissible corrections of operational failures by retroactive amendment. 
  • Extend the safe harbor correction methods described in Appendix A.05(9) to: (1) deferral failures involving after-tax contributions, (2) partial-year exclusion failures, (3) terminated participants, and (4) participants who did not receive notice within 45 days of correct deferrals commencing. 
  • Provide additional examples of “significant” and “insignificant” operational failures. 
  • Add new earnings adjustment calculation methods to the existing safe harbor methods in EPCRS, Appendix B, Section 3. 
  • Clarify the missed deferral opportunity for an excluded NHCE in a non-safe harbor plan if no NHCE made a deferral to the plan during the applicable plan year.

In the letter, the ARA makes a variety of specific recommendations. 

Correction by Retroactive Amendment Under SCP 

“The myriad rules applicable to retirement plans are difficult for any plan sponsor to navigate, and particularly difficult for small businesses that may not employ dedicated benefits personnel,” the ARA writes, adding that it  “believes expansion of SCP will promote plan sponsor compliance.”

In correcting the retroactive amendment provisions of the SCP, the ARA addresses two areas: 

  1. Failure of a Related Participating Employer to Adopt the Plan. Section 4.05(a)(i) of Rev. Proc. 2021-30 permits a plan to correct an operational failure by plan amendment in order to conform the terms of the plan to the plan’s prior operations if the plan amendment would result in an increase of a benefit, right, or feature, the ARA notes. It tells the IRS that an error its members frequently see is participation by employees of a company related to a plan sponsor (i.e., a member of a controlled group or an affiliated service group) but the failure of the related business to sign a participating employer agreement. “It is not clear whether the addition of a participating employer’s employees is a ‘benefit, right, or feature’ that may be corrected under SCP by retroactive amendment,” says the ARA. The ARA recommends that the IRS “revise Section 4.05 to specifically permit plan sponsors to adopt a retroactive amendment to correct an error involving the participation of a related employer's employees (who otherwise meet the plan’s eligibility conditions) when that employer did not take the necessary steps to adopt the plan.”
  2. Meaning of a “Benefit, Right, or Feature” When Correcting Operational Failures. The phrase “benefit, right, or feature” in Section 4.05(a)(i) of Rev. Proc. 2021-30, has a specific meaning in other contexts applicable to retirement plans, the letter notes. For instance, under Treas. Reg. §1.401(a)(4)-4(e), it is unclear whether a plan sponsor can use SCP to adopt a corrective amendment if the plan provides for a 3% nonelective employer contribution but the employer erroneously made a 5% nonelective contribution. The ARA recommends that the IRS clarify that “benefit, right, or feature” under Section 4.05(2) of Rev. Proc. 2031-30 should be interpreted broadly and is not limited to plan provisions that qualify as benefits, rights, or features under Treas. Reg. §1.401(a)(4)-4(e). 

Extend Safe Harbor Correction Methods 

The safe harbor correction methods described in Appendix A .05(9) of Rev. Proc. 2021-30, says the ARA, “appropriately encourage plan sponsors to closely monitor plan operations to detect and correct any errors quickly.” The ARA requests this expansion of this provision so that it also includes the following situations in order to provide the same correction incentives:

  • After-Tax Contributions. The ARA recommends that the IRS modify the safe harbor correction methods described in Appendix A, Section .05(9)(a) and (b) of Rev. Proc. 2021-30 to include failures relating to after-tax employee contributions. “The rationale for allowing a reduced or no QNEC when correcting elective deferral failures applies equally to correcting after-tax contribution failures,” it says.
  • Partial-Year Exclusion Failures. Appendix B, Section 2.02(1)(a) states that the Appendix A, Section .05 correction is available when an employee is improperly excluded from electing and making contributions or receiving matching contributions for a portion of a plan year. The ARA notes, however, that Appendix B only references the correction methods in Appendix A, Section .05(2)-(5), which include the 50% and 40% QNEC corrections, but not the remaining paragraph of Appendix A Section .05, including Section .05(9). The ARA suggests the IRS clarify that all of the corrections permitted in Appendix A, Section .05 apply to failures that occur for only a portion of a year.
  • Elective Deferral Failures for Terminated Participants. The reduced QNEC corrections provided for in Appendix A, Section .05(9)(a) and (b) do not apply to terminated participants because they cannot have ongoing elective deferrals, writes the ARA. In the letter, the ARA, says it believes that there should be similar incentives for plan sponsors to correct failures relating to terminated employees, and that terminated employees also would benefit from rapid corrections. The ARA recommends that the reduced QNEC corrections be expanded to include terminated participants. 
  • Extension of Timeline for Required Notice. Under the safe harbor correction methods in Appendix A, Section .05(9)(a) and (b), a notice must be sent to participants within 45 days of when the correct deferrals begin. “This,” argues the ARA, “provides a disincentive for plan sponsors to correct a deferral error as soon as the error is discovered.” A sponsor who corrects such an error immediately and then seeks advice regarding corrections for the period during which correct deferrals were not made often finds itself beyond the 45-day required notice period. Thus, the plan sponsor's prompt action in correcting ongoing deferrals results in that sponsor paying a higher QNEC than the sponsor who discovers the same error and does not correct ongoing deferrals until seeking counsel. 

The ARA recommends that the IRS extend the notice timeline to ensure that plan sponsors who correct deferral errors in a timely manner are not penalized for their promptness. Specifically, the ARA recommends that the deadline for providing the notice be within 45 days after the last day that correct deferrals could have begun under Appendix A, Section .05(9)(a) and (b). Alternatively, the ARA suggests, the IRS should extend the 45-day deadline to the earlier of: (a) 180 days after correct deferrals begin, or (b) 45 days after the last day that correct deferrals could have begun under the applicable safe harbor correction method.

Provide Additional Examples of ‘Significant’ and ‘insignificant’ Operational Failures 

Insignificant failures can be corrected at any time through EPCRS, the ARA notes; however, it adds, “it is often unclear to practitioners and plan sponsors whether an error is significant or insignificant.” This, it says, causes some plan sponsors to file under the Voluntary Compliance Plan (VCP) in an abundance of caution. “ARA believes clarification of what is significant coupled with safe harbor tests would reduce the need for defensive precautionary VCP submissions,” the letter says. The ARA “recommends that the Service provide additional information and examples under EPCRS Section 8.02 to help plan sponsors determine an error’s significance.” 

More specifically, the ARA suggests providing at least one example illustrating each factor and provide safe harbors where possible. Further, the ARA recommends that EPCRS be amended to provide that if a plan sponsor determines in good faith that an error is insignificant and self-corrects such an error, and on audit, the IRS disagrees about its significance, the Audit CAP sanction would be limited to the amount the sponsor would have paid as a VCP filing fee. 

Adding Earnings Adjustment Calculation Methods 

Because of the uncertainty regarding how to calculate earnings, says the ARA, some plan sponsors use the VCP when the error otherwise could be corrected through the SCP. Further, it says, the existing earnings calculation methods provided in Appendix B, Section 3 of EPCRS “can be impractical” in many situations, such as when:

  • when there are a significant number of investment choices;
  • when the affected participant(s) changed investment options; or 
  • when the plan has changed service providers and the previous service provider is unwilling to calculate earnings. 

In addition, the ARA observes, plan earnings often are available only for a full statement cycle and take time to produce; at the same time, it says, performance of indexes like the S&P 500 or a single fund that is used as a qualified default investment alternative are readily available for any business day or time period. These more efficient methods would be helpful in situations where the plan sponsor wants to post earnings to finish a correction timely and/or avoid additional earnings on earnings calculations. ARA recommends that the Service include the following earnings calculations in Appendix B, Section 3, as safe harbor methods of calculating earnings:

  • the average earnings rate of funds held in the plan; 
  • an index rate, such as the S&P 500 or a blended rate of indices weighted based on the plan’s allocation to equity and fixed income; or 
  • the earnings on the plan’s qualified default investment alternative (if the plan includes such as alternative).

Clarify Missed Deferral Opportunity When No NHCE Deferred 

“It is unclear what the missed deferral opportunity is in a non-safe harbor plan in which all NHCEs were improperly excluded from participation and there were no matching contributions,” writes the ARA. It suggests that the IRS expand Appendix A 0.5(2) to include an example of how a missed deferral percentage should be calculated in this scenario, and specifically asks the IRS to provide that the missed deferral opportunity is the greater of: (a) 3% (as prescribed under the Treasury Regulations when using the prior year testing method in the plan’s first year); or (b) the rate needed to pass the Actual Deferral Percentage (ADP) test.

The Bottom Line

The ARA says that it believes each of these additions to EPCRS will: 

  • promote sound tax administration by encouraging voluntary compliance by plan sponsors;
  • create an incentive for rapid correction of errors; 
  • resolve a significant issue relevant to many retirement plan sponsors; 
  • and improve economic efficiency by reducing the complexity and burdens on the plan sponsor.