TAX ALERT  |  July 19, 2021

On July 16, 2021, the IRS issued Rev. Proc. 2021-30, superseding Rev. Proc. 2019-19, and revising the Employee Plans Compliance Resolution System (EPCRS) to add significant new correction methods for qualified plans. Rev. Proc. 2021-30 updates EPCRS corrections for 401(a), 403(a), 403(b), 408(k) or 408(p) plans. 

In general, the EPCRS permits plan sponsors to correct plan qualification failures in operation and in form, and thereby allows qualified plans to provide retirement benefits on a tax-favored basis. EPCRS consists of the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP). 

The newly released Rev. Proc. 2021-30 modifies and supersedes Rev. Proc. 2019-19 and provides the following modifications:

Two new overpayment corrections for defined benefit plans

Under prior rules, when participants or beneficiaries of a defined benefit plan received a payment greater than what they are entitled to under the terms of the plan, the employer had to request repayment and if the participant did not repay the excess payment, the employer had to reimburse the plan. Now effective, July 16, 2021, the IRS has added two new overpayment correction methods, (1) the funding exception correction method and the (2) contribution credit correction method. These methods reduce the need for defined benefit plans to seek recoupment from overpayment recipients and, when the employer seeks a refund of the overpayment, they ease the process for overpayment recipients to repay overpayments. From an employer’s perspective, if the plan is not an underfunded plan or the plan’s minimum required contribution for the year reflects the overpayment, there may not be a need to make a specific reimbursement payment to the plan.

Threshold amount for overpayments not requiring correction is increased from $100 to $250

The updated Revenue Procedure provides that, generally, if the total amount of an overpayment is $250 or less, the plan sponsor is not required to seek the return of the overpayment from the recipient, or to notify the recipient that the overpayment is not an eligible rollover distribution. The limit under the prior rule was $100.

Extension of self-correction period for significant failures is extended from two years to three years

The updated Revenue Procedure extends the end of the SCP correction period for ‘significant’ failures from the last day of the second plan year following the year in which the failure occurred to the last day of the third plan year following. 

Elimination of the requirement that self-correction by plan amendment must affect ‘all eligible participants’

Previously, self-correction by plan amendment was permitted only if: (a) the plan amendment would result in an increase of a benefit, right or feature for all plan participants; and (b) the increase in the benefit, right or feature to participants is permitted under the Code and satisfied the Revenue Procedure’s correction principles. The new Revenue Procedure eliminates the prior condition that permitted self-correction by plan amendment only if a plan amendment increased a benefit, right or feature applied to all participants.  

For example, if a plan erroneously included auto allowance amounts in calculating plan benefits, the employer could not correct the error by amending the definition of compensation to include auto allowances, because such an amendment would benefit only those participants who received an auto allowance, but would not benefit those participants who did not receive auto allowances. Under the new rule, such an amendment is potentially allowable, if the amendment meets the requirements described below.

Under the new Revenue Procedure, the expanded rule provides that self-correction by plan amendment is permitted only if: (a) the plan amendment would result in an increase of a benefit, right, or feature; and (b) the increase in the benefit, right or feature to participants is permitted under the Code and satisfied the Revenue Procedure’s correction principles. Nondiscrimination rules continue to apply to such corrections.

Elimination of anonymous submissions

Effective Jan. 1, 2022, the new Revenue Procedure eliminates the anonymous submission procedure under the VCP and adds an anonymous, no-fee, VCP pre-submission conference procedure.

Payment of Audit CAP sanctions required through Pay.gov

Effective Jan. 1, 2022, the new Revenue Procedure will require that Audit CAP sanctions must be paid through the Pay.gov website.

Extension of safe-harbor correction method for some missed elective deferrals

The updated Revenue Procedure extends by three years the popular safe harbor correction method available for some missed elective deferrals. Under the prior rule, these safe harbors sunsetted at the end of 2020. The new provision is retroactive to Jan. 1, 2021, and the new safe harbor has a sunset date of Dec. 23, 2023. Specifically, this refers to the special correction methods for automatic enrollment 401(k) and 403(b) plans, as well as certain missed deferrals in non-automatic enrollment plans. The IRS has designed these safe harbors to reduce the cost to employers to correct these failures.