The Internal Revenue Service Advisory Council (IRSAC) suggests that the Employee Plans Compliance Resolution System (EPCRS) be expanded. The suggestion is contained in the group’s 2023 annual report, issued on Nov. 9.
In the report, IRSAC makes 23 recommendations on a wide range of topics. Among them are suggestions from its Tax Exempt and Government Entities Subgroup—whose members include attorneys, certified public accountants, and financial and benefit advisors—concerning self-correction guidance for employee plans. Those recommendations center on EPCRS, the system by which users can correct most plan failures and maintain tax-favored status. 
The subgroup notes that Section 305 of the SECURE 2.0 Act of 2022 significantly expanded the self-correction program (SCP) under EPCRS so that it also covers most inadvertent failures, as long as they are addressed “within a reasonable time frame” unless other guidance or regulations apply that preclude its application. They add that Section 305 also directs the IRS to update EPCRS within two years of the Dec. 29, 2022 enactment of the SECURE 2.0 Act.
Information, Please
Consequently, says the subgroup, the Employee Plans (EP) office of the IRS Tax Exempt and Government Entities (TE/GE) Division asked IRSAC for:
- advice regarding whether there are additional plan failures and/or correction methods EPCRS should address in light of the further expansion of the SCP;
- feedback on whether there are any available means the IRS could use to keep better apprised of how and when plan sponsors self-correct plan failures; and
- whether there are inadvertent failures the EP office should continue to require be filed under the EPCRS voluntary correction program (VCP).
The subgroup reports that in order to provide that information, it conducted informal surveys of plan sponsors and practitioners in a variety of industry groups. This enabled IRSAC to identify the following areas in which it says further IRS guidance would be helpful.
Failures that occur when contributions are made to the wrong plan. Many governmental employers maintain multiple retirement plans under Code Sections 403(b), 401(a) and 457(b), the report says, and sometimes contributions that should be made to one type of plan are erroneously deposited in another.
The subgroup argues that the most efficient and effective way to correct this mistake would be to directly transfer the assets from the plan to which they were erroneously deposited to that to which they should have been. However, says the subgroup, it is not clear that this way of correcting the mistake is possible absent IRS guidance.
Calculating actual lost earnings for failures that have occurred. Many plan sponsors struggle with such calculations when failures have occurred over many payroll periods, across calendar years, or involve multiple recordkeepers, says the report. The subgroup argues that it would greatly reduce the burden on plan sponsors and make corrections more timely if they could use the Department of Labor’s (DOL) lost-earnings calculator “as a reasonable alternative method for calculating lost earnings.”
Self-correction by retroactive amendment. The subgroup suggests that self-correction by retroactive amendment be expanded. It adds that self-correction by retroactive amendment to conform to actual operation should be allowed, but that self-correction should not be permitted by retroactive plan amendments to conform to operations if the amendments reduce participant rights or benefits—unless there is clear evidence that the plan operation was consistent with participant communications and expectations.
Mandatory employee contributions. Many governmental plans require mandatory employee contributions, says the subgroup, and often in accordance with state law. The report says IRS guidance on how to correct failures involving an underpayment of mandatory employee contributions would be helpful.
Required minimum distribution (RMD) failures. Such errors sometimes occur because the financial institution/insurer holding the participant’s account fails to timely begin RMDs on time. It would be helpful, says the report, if the IRS provided guidance on how to correct an RMD failure when a deselected vendor fails or refuses to make an RMD and the plan sponsor lacks control over the assets.
Overpayments. The subgroup says that revising EPCRS to address changes SECURE 2.0 made regarding correction of overpayments would help plan sponsors.
How EPCRS is organized. The subgroup said it would be helpful if the general organization of EPCRS were reconsidered so it could be easier to find guidance related to a particular correction.
The EP office also asked the subgroup how it could do a better job of keeping apprised regarding how employers are using the SCP. IRSAC said that in its view, comments from plan sponsors on EPCRS updates is the best way to do that.
Recommendations
The subgroup made the following recommendations regarding EPCRS.
Expand EPCRS to:
- permit direct transfers between different types of plans maintained by the same employer when contributions have erroneously been made to one plan and should have gone to another;
- allow plan sponsors to use the DOL lost-earnings calculator as an alternative method for calculating lost earnings when correcting failures;
- allow a retroactive amendment to correct an ADP/ACP testing error by changing testing methods if the amendment would have been permitted under the Internal Revenue Code if timely adopted and it does not favor highly compensated employees (HCEs) over non-HCEs;
- allow plan sponsors to self-correct failures to in order to amend the plan for tax law changes in a timely fashion;
- provide guidance on how to correct failures regarding underpayments and excess mandatory employee contributions to governmental plans; and
- address corrections of RMDs missed due to vendor failures when a deselected vendor fails or refuses to make them and the plan sponsor has no control over the assets.
Update EPCRS to address statutory changes in Section 301 of SECURE 2.0 regarding correction of overpayment errors.
Reorganize EPCRS to group together all correction methods related to a single type of failure to facilitate compliance.
Review the types of errors being filed under the VCP to determine additional guidance that may be needed so plan sponsors can self-correct for the same errors.
Continue to request comments from plan sponsors on EPCRS updates so as to gather information on how employers are using the SCP.
About IRSAC
IRSAC is a federal advisory committee that provides an organized public forum for discussion of relevant tax administration issues between IRS officials and representatives of the public. Its members offer observations regarding current or proposed IRS policies, programs and procedures.
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