Miss a Plan Restatement Deadline? SCP to the Rescue!

The laws are constantly changing—and plan documents have to be updated to keep up. But if you miss a deadline, there’s a new, and easier, way to fix things.

 

Historically, the Voluntary Compliance Program (VCP) was the only way to handle a missed restatement—but that requires an IRS submission AND the payment of a user fee.

 

 

Due to recent changes to the Employee Plans Compliance Program System (EPCRS), it may now be possible for plan sponsors to self-correct the failure to timely restate the plan[1].

 

EPCRS was modified last year with the issuance of Rev. Proc. 2019-19. One of the changes to the program was the expansion of the Self-Correction Program (SCP) to include the ability to self-correct certain plan document failures[2]. The Rev. Proc. does not specifically state that a missed restatement is a plan document failure. The IRS, however, has informally stated that SCP was modified to permit the self-correction of missed restatements, and this interpretation can also be inferred by an SCP example on the IRS website.

 

Is missing a restatement deadline a plan document failure?

 

In other words, can the IRS disqualify a plan solely because the plan was not restated?

 

Technically, no. However, if a plan is not restated, then there is no assurance that the terms of the plan, including any interim or discretionary amendments, satisfy the qualification requirements. If the existing plan and amendments contain no disqualifying defects, then technically there is no defect that must be corrected by physically restating the plan.

 

At that point, though, the plan would be considered an individually designed plan—defeating the purpose of having taken advantage of the efficiencies and convenience of the original IRS pre-approved design. Practitioners and plan sponsors understandably do not want to be in that position and therefore typically assume there is plan document failure when a plan has not been timely restated.

 

 

There are three conditions that must be satisfied to use SCP. These are not unique to plan document failures—they generally apply to any failure trying to be corrected under SCP.

 

Let’s look at each of these and see how they apply to a missed restatement.

 

The plan must have a favorable letter.

 

For 403(b) plans, there were no IRS pre-approved plans prior to the most recent restatement period. Thus, a special definition of “favorable letter” applies to 403(b) plans. Simply stated, a 403(b) plan is treated as having a favorable letter if the existing document complies, in good-faith, with the 2009 provisions of the Code and regulations[3].

 

Most 403(b) plans will satisfy this condition of SCP eligibility.

For qualified pre-approved plans, a favorable letter means a favorable opinion or advisory letter issued regarding the most recently expired six-year remedial amendment cycle under Rev. Proc. 2016-37[4]. Unlike the special definition for 403(b) plans, this definition of favorable letter would preclude the use of SCP for a missed restatement. For example, the second restatement cycle for defined benefit (DB) plans ended on July 31, 2020. This is now the most recently expired six-year remedial amendment cycle. If a plan was not restated by the deadline, then the plan does not have a “favorable letter” and is ineligible to use SCP.

 

So, on its face, SCP cannot be used to self-correct a missed restatement of a qualified plan. The intention of the IRS to permit the use of SCP can be inferred from the IRS website. While it is not binding precedent, it may provide some comfort that SCP can be used to correct a missed restatement.

 

The answers to the following example from the IRS website assumes that SCP is available. In the answer, the conclusion is not available. But the reason is not that SCP is never available. Rather, the IRS explains that SCP cannot be used because the correction was before the effective date of the revenue procedure (before that, only VCP was available). And it states that even if SCP had been available before 2019, it would still be inapplicable in the example because the two-year correction period expired. The answer therefore assumes that SCP is generally available for a missed restatement, it is just not available based on the facts of the specific example.

 

 

The answer is no. The failures can’t be resolved under SCP. The correction of the failures occurred before April 19, 2019, the effective date of the revenue procedure. Before April 19, 2019, the correction of these failures needed to be accomplished via VCP or Audit CAP. Even if the failures had been uncorrected they would still be ineligible for SCP under Rev. Proc. 2019-19 because correction would be occurring after the end of the two-year period for correcting significant failures under SCP. That period would have ended on Dec. 31, 2012 for the EGTRRA failure and Dec. 31, 2018 for the PPA failure.

 

 

Plan document failures are considered significant errors so they must be corrected within a two-year correction period. The two-year correction period generally is the last day of the second plan year following the plan year for which the failure occurred[5]. The revenue procedure provides that if a 403(b) plan does not have a designated plan year, the plan year is deemed to be the calendar year.

 

The IRS, on its website[6], states that in the case of a plan document failure, the failure begins in the plan year that includes the end of the applicable remedial amendment period.

 

For example, if a calendar-year 403(b) or DB was not timely restated, then the failure begins in 2020. The two-year correction would end at the end of the second plan following the plan year of the failure, which is Dec. 31, 2022. If the plans were fiscal years ending on May 30, then the 403(b) plan must be correct by June 30, 2022, and the DB plan by Dec. 31, 2022.

 

 

The IRS doesn’t provide insight into specific practices and procedures. However, the revenue procedure does state that the practices and procedures can be formal or informal (i.e., they do not need to be written). Of course, even the most extensive of practices and procedures do not address a pandemic, which is a reason many plan sponsors may have for missing the deadline.

 

 

One could do nothing and take the position that a restatement is not a qualification requirement and that existing documents have no disqualifying defects. As stated above, this is not a practical solution.

 

The other option is to use the VCP. Keep in mind that in 2018 the IRS made significant changes to the VCP user fees. First, the user fees are now based on the plan assets rather than the number of participants. Second, there is no longer a 50% reduction in the user fee for plans that are restated within one year of the applicable restatement deadline.

 

Thus, regardless of when a VCP submission is made for a late restatement, the current user fee is:   

 

 

Assets	User Fee
$500,000 or less	$1,500
Over $500,000 to $10 million	$3,000
Over $10 million	$3,500

 

 

Even though it is not explicitly stated in Rev. Proc. 2019-19, a missed 403(b) restatement can be corrected using SCP if the conditions are satisfied. It is not as clear regarding DB plans and other qualified plans. We have indications from the IRS that it is available, but the revenue procedure appears to support those intentions. The ARA has raised the issue with the IRS, and we hope the IRS will confirm, in a more explicit way, that SCP can be used for the missed restatement of a qualified plan.

 

 

[1] The clock is always moving, but two of these plan document restatement deadlines recently expired: June 30, 2020, for 403(b) plans and July 31, 2020, for pre-approved DB plans. For calendar year 403(b) and DB plans, this self-correction period ends on Dec. 31, 2022. This means no IRS submission and no IRS user fees!

 

[2] Rev. Proc. 2019-19 §7.03 provides [bracketed language added]: Plan Document Failures. An eligible plan document failure, as described in section 4.01(1)(b), may be corrected under SCP provided that the requirements described in section 4.05(2)(c)(I) [Favorable Letter requirement] and 4.05(2)(c)(ii) [treating plan document failures under SCP as significant failures] are satisfied.

 

[3] Rev. Proc. 2016-37 §6.10(2) provides (emphasis added): In addition, for purposes of this revenue procedure, a 403(b) Plan will be treated as having a favorable letter if either (a) the employer is an eligible employer and, on or before Dec. 31, 2009 (or the date a 403(b) plan is established, if later), the employer has adopted a written 403(b) Plan that is intended to satisfy Section 403(b) (including the regulations thereunder) effective as of Jan. 1, 2009 (or the first day of the plan year in which a 403(b) plan is established, if later), or (b) the employer has failed to adopt a written 403(b) plan timely and corrects the failure in accordance with Section 6.10(3) below. In addition, for purposes of Section 4.04 (requiring that the plan sponsor or administrator of the plan have established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Code requirements in order to be eligible for SCP to be available to correct operational failures and plan document failures), the requirement to have established practices and procedures only applies for failures during periods after Dec. 31, 2009.

 

[4] Rev. Proc. 2019-19 §5.01(b)(4) provides: (b) Favorable Letter for Pre-approved Plans. In the case of a pre-approved plan, the term “favorable letter” means a favorable opinion or advisory letter issued with respect to the most recently expired six-year remedial amendment cycle under Rev. Proc. 2016-37. In the case of a terminated pre-approved plan, the plan is treated as having a favorable opinion letter or advisory letter if the plan is terminated before the expiration of the plan’s current remedial amendment cycle determined under the provisions of Rev. Proc. 2016-37, and the plan was amended to reflect the qualification requirements that applied as of the date of termination.

 

[5] Rev. Proc. 2019-19 §9.02

 

[6] https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-you-havent-updated-your-plan-document-within-the-past-few-years-to-reflect-recent-law-changes