In recent years, the IRS has been making moves toward allowing more safe harbor self-corrections for qualified retirement plans. More corrections can be completed under the IRS self-correction program (SCP) without filing for approval under the voluntary correction program (VCP) (both are programs under the IRS’ Employee Plans Compliance Resolution System, or EPCRS).
Whether this trend is the result of a desire to encourage more corrections, or a self-interest in alleviating workload for the understaffed IRS , the result is an opportunity for plan administrators. But it is not as simple as it sounds. Plan administrators will still need the help of experienced professionals, such as ERISA counsel, to carry out self-corrections.
Expansion of Self-Correction
The recent expansion of self-correction opportunities under EPCRS include:
- In 2019, the IRS expanded the ability to self-correct certain operational failures by adoption of retroactive amendments, as long as the amendment results in increased benefits, rights, and features to eligible employees, and is permitted under the Code and general EPCRS principles. Prior to this, a correction by retroactive amendment almost always required filing a VCP submission.
- In 2021, the IRS extended the self-correction period for significant failures to the end of the third year following the year of the failure. Prior to that, significant failures could only be self-corrected if they were fixed by the end of the second year following the year of the failure. In addition, the IRS eliminated the requirement that a self-correction by retroactive amendment apply to all eligible employees, which had limited the situations under which the 2019 guidance could be used.
- On May 23, 2022, the IRS’ Employee Plan News discussed the consequences of a pre-approved plan failing to adopt one or more required restatements or interim amendments, and announced the ability to self-correct within the three-year self-correction period. Prior to this “soft” guidance, this type of failure was routinely corrected through VCP.
- At the end of 2022, the SECURE Act 2.0 expanded self-correction further to permit self-correction for any eligible “inadvertent” operational failure, as long as there are procedures in place for operational compliance. While the IRS has two years in which to provide more specific guidance and issue an updated EPCRS revenue procedure, this signals a liberal expansion of SCP.
All of these actions by the IRS and legislators demonstrate that self-correcting is gaining acceptance and is encouraged.
What SCP is and What SCP is Not
A simplified description of SCP is that “insignificant” failures can be self-corrected at any time (even under audit!), and “significant” failures can be self-corrected within the specified correction period, currently by the end of the third plan year following the year in which the failure occurred. However, under the new SECURE 2.0 rules, eligible inadvertent operational failures can be corrected at any time, even if they would otherwise be considered significant. This is a broad expansion of SCP but it is also fairly vague until further guidance is issued. What exactly is an eligible inadvertent operational failure? All we really know at this point is that it is a failure to meet any requirement under Code Sections 401(a), 403(a), or 403(b) as long as the failure occurred through an oversight or mistake in applying established practices and procedures that have otherwise been routinely followed. This would not include egregious failures, failures that relate to the diversion or misuse of plan assets, or is directly or indirectly related to an abusive tax avoidance transaction. And the correction must be made within a “reasonable” time after discovery. So, while this is generally a positive move, it can be very confusing for plan administrator, at least until more clarity is provided from the IRS.
Another consideration is that a self-correction does not get a direct IRS blessing, so it is always best to correct using a safe harbor method that is “pre-approved” by the IRS, and described in the latest revenue procedure setting out EPCRS, which addresses all of the correction programs, including SCP and VCP.
And while SCP is a nifty option for plan administrators, eliminating the preparation and filing costs of a VCP submission, it does not mean that it will not involve significant costs and require the services of outside professionals. “Self” in “self-correction” is a misnomer. It really only means “without the IRS.” And that means it is important to get it right, which will almost always require experts.
TPAs and Attorneys: Vital Self-Correction Partners
Third-party administrators (TPAs) and benefits attorneys need to be consulted to assess, advise, and carry-out self-corrections. A plan administrator cannot do this alone. TPAs and benefits attorneys serve an important role in this process:
- TPAs. TPAs will generally be the party who identifies the failures requiring correction in the first place. In addition, they will be vital to:
- Gathering data to determine the scope of the failures.
- Performing any calculations.
- Facilitating the final corrections.
- Attorneys. Attorneys, particularly benefits counsel, will advise regarding:
- Eligibility for self-correction, including an analysis of whether the failure is an inadvertent operational failure, correction is being made within a reasonable time after discovery, and there practices and procedures in place, under a good faith standard until guidance is issued.
- Proper correction method, including when it might be beneficial to file under VCP rather than self-correcting with a pre-approved method.
- Documenting the analysis of both of the above. Documentation, including a memo describing both the analysis and the actual correction as completed is vital when and if an audit is performed. Unlike a correction done under VCP, which is protected from, and not scrutinized under a later audit, a self-correction can be reviewed on audit.
- Review of existing practices and procedures and recommend revisions where might be gaps in routine compliance, so the ability to self-correct is preserved.
Plan administrators should not be complacent and look at self-correction as license to just “wing it” and move on. SCP and the correction methods under EPCRS are not always straight forward and definitely require careful analysis by seasoned professionals to give plan administrators the best options for maintaining the qualified status of the plan.