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The Internal Revenue Service recently revised its voluntary correction program for employee retirement plans—the Employee Plans Compliance Resolution System (EPCRS). Perhaps the most significant change is that EPCRS and its correction methodologies are now available to 403(b) plans on substantially the same terms as tax-qualified plans. The new EPCRS is published in Revenue Procedure 2013-12 http://www.irs.gov/pub/irs-drop/rp-13-12.pdf and is effective as of April 1, 2013.
By way of background, before 1993, the IRS did not offer a formal program to correct errors in plans. If a plan was not operating properly — perhaps it was improperly excluding or including some employees, or making contributions that were too large or too small under the Code – then the plan would be in danger of losing its tax-favored status. As a result, all of the assets in a participant's account would be immediately taxable to that participant, retroactive to the day the first contributions were made. Tax deductions for contributions the employer made to the plan would need to be reversed.
EPCRS provides plan sponsors with an avenue to correct errors and preserve the tax-favored status of plan assets.
EPCRS consists of three different programs: (1) the Self-Correction Program, which permits certain limited failures to be corrected by the plan sponsor without seeking approval from the IRS; (2) the Voluntary Correction Program, or VCP, which permits plan sponsors to remedy more egregious errors, by paying a limited fee and obtaining approval from the IRS for the manner of correction; and finally, (3) the Audit Closing Agreement Program, or Audit CAP, which is available even if an error is discovered after a plan is under audit, subject to the payment of a sanction amount. While the correction process is not without cost, EPCRS can be a reliable remedy for a plan error.
Some correction methods are spelled out in EPCRS. If an employer uses an EPCRS method that corrects a listed mistake, then the employer can rely on that correction for continued plan qualification. Other correction methods are also permitted, so long as the correction is considered reasonable and appropriate. Generally, employers are directed to use a correction method that makes the plan whole and that corrects all occurrences of the error in all plan years. This may require additional plan contributions, but the result is the continued maintenance of a compliant plan.
As noted above, one of the most welcome changes in this version of EPCRS is its application to 403(b) plans, or Tax-Sheltered Annuity (TSA) Plans. 403(b) plans may be sponsored by governmental employers, church organizations and other tax-exempt entities.
This version of EPCRS finally catches up to the significant changes in the 403(b) Treasury Regulations that were finalized in 2007, and made effective for taxable years beginning on or after January 1, 2009. Prior to January 1, 2009, 403(b) plans were not required to have written plan documents. Consequently, there were no concerns with a "403(b) plan document failure" in the prior versions of EPCRS. Since January 1, 2009, however, the Treasury Regulations have required that 403(b) arrangements must be set out in a written plan, but there has been no IRS-approved way to correct any failures. In addition, after December 31, 2010, a plan sponsor had no opportunity to timely adopt a 403(b) plan document if the sponsor had not already done so. EPCRS now offers one more chance for employers to bring their 403(b) plans into compliance, or to adopt a written plan for the first time. A plan sponsor that did not adopt a timely plan document (by December 31, 2010) may submit its written plan document along with a VCP application. As an added incentive, the compliance fee under the VCP component is reduced by 50% if an employer submits its 403(b) plan to the IRS for approval as a compliant document by December 31, 2013.
The new EPCRS is available to all sponsors of retirement plans that are intended to satisfy Sections 401(a), 403(b), 408(k) or 408(p) of the Internal Revenue Code. In plainer terms, the EPCRS is available to correct errors in such retirement plans as profit sharing plans, 401(k) plans, tax-sheltered annuity plans, SEPs and SIMPLE plans.
The bottom line? For all plan sponsors, EPCRS offers a reliable way to correct potentially costly plan errors through an IRS-approved process. For 403(b) plan sponsors, there is now clear guidance on correction methods. Finally, for every 403(b) sponsor that has yet to adopt a written plan, the IRS has made you an offer that you can't refuse. The deadline is only months away.
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This E-Alert is provided for informational purposes only. It is not intended to serve as legal advice or legal opinion. Devine, Millimet & Branch, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such. Our attorneys are available to assist employers in their compliance efforts and to represent employers in matters before state and federal courts and administrative agencies. For more information, please contact the attorney(s) listed or the Devine Millimet attorney with whom you regularly work.
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