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SECURE 2.0 Expansion of the Employee Plans Compliance Resolution System (EPCRS)

What is EPCRS?

The Employee Plans Compliance Resolution System (EPCRS) is in place to fix mistakes in a retirement plan so that plan sponsors can avoid plan disqualification. There are three ways to correct mistakes under EPCRS according to the IRS:

1. Self-Correction Program (SCP) – Plan sponsors are permitted to correct certain plan failures without contacting the IRS or paying a fee.
2. Voluntary Correction Program (VCP) – Plan sponsors are permitted to pay a fee and receive IRS approval for correction of plan failures (any time before a plan audit).
3. Audit Closing Agreement Program (Audit CAP) – Plan sponsors are permitted to pay a sanction and correct a plan failure while the plan is under audit.

Revenue Procedure (Rev. Proc.) 2021-30

The current EPCRS program is laid out in Rev. Proc. 2021-30. Historically, Rev. Proc. 2021-30 provided that, under SCP, a plan sponsor of a qualified plan or 403(b) plan generally may self-correct certain significant operational failures and plan document failures by the last day of the third plan year following the plan year for which the failure occurred. Certain failures were also excluded from self-correction such as plan document errors, loan failures and eligibility failures.

SECURE 2.0 Expansion of EPCRS

SECURE 2.0 expands the ability for plan sponsors to make self-corrections proactively. Under Section 305, a plan sponsor may correct any “eligible inadvertent failure” at any time. An “eligible inadvertent failure” is generally a failure that:

• Is not identified by the IRS prior to any actions demonstrating a specific commitment to implement a self-correction with respect to the failure
• For which the self-correction is completed within a reasonable period after the identification of the failure
• Is not egregious
• Does not involve the misuse or diversion of plan assets
• Does not directly or indirectly relate to an abusive tax avoidance transaction
• Occurs despite the existence of established and routinely followed practices and procedures reasonably designed to promote and facilitate compliance with the applicable requirements of the Internal Revenue Code

Updated Guidance – Notice 2023-43

The Notice explains that plan sponsors can begin self-correcting certain eligible inadvertent failures (subject to certain limitations outlined in the notice) before EPCRS has been updated. SECURE 2.0 instructed the IRS to update Rev. Proc. 2021-30 no later than two years after the date of enactment (December 29, 2024.) However, there are several eligible inadvertent failures that a plan sponsor may not self-correct before the date Rev. Proc. 2021-30 is updated. Such failures include:

• Failure to adopt initial written plan
• Orphan plan failures
• Significant failure in terminated plan
• Demographic failures (coverage, nondiscrimination, participation testing)
• Operation failures corrected by amendment resulting in less favorable benefit to participant
• ESOP failure involving tax consequences other than plan disqualification
• SEP or SIMPLE IRA failures with excess contributions remaining in IRA or for plans that do not use model/prototype document

Defining a “Reasonable Period” for Self-Correction

The notice clarifies that self-correction needs to be completed within a reasonable period after the failure is identified. The majority of eligible inadvertent failures will be considered corrected within a reasonable period if corrected by the last day of the 18^th month following identification of the failure.

An eligible inadvertent error may be self-corrected before being identified by the IRS and may even be self-corrected post-identification if the plan sponsor can demonstrate “specific commitment to implement a self-correction” which includes:

• Specific identification of failure; and
• Actively pursuing correction

Correcting Plan Errors Moving Forward

It is important to note that Notice 2023-43 provides guidance and is not the final rule. Plan sponsors along with their service providers should continue to review and monitor the administration of their plan. If a mistake has been made, document each step of the correction process, and keep notes in a file that explains why a corrective action was taken. Having procedures in place will be helpful in case the plan is ever audited down the road.

Your Spectrum representative is available to help you answer any questions you may have about the self-correction of plan errors.