Update to the Employee Plans Compliance Resolution System (EPCRS)

Recent updates to EPCRS. And currently there are three revenue procedures that basically govern the world of EPCRS, which is the Employee Plans Compliance Resolution System, the system we all use to fix plan document and operational failures that occur during the daily administration of qualified retirement plans, including SEPs and SIMPLEs.

Rev. Proc. 2015-27 made specific targeted changes to revenue procedure 2013, touching upon some of the specific correction programs within EPCRS, the correction principles, et cetera. While Revenue Procedure 2015-28 introduced two new safe harbor correction methods for 401(k) plans. And what this revenue procedure basically talks about are some clarifications that we made to the correction methods or principles involving overpayment failures, and overpayment under EPCRS is generally when a participant receives money from a retirement plan that they’re not entitled to payment. The other topic that’s covered by the new revenue procedure is a correction we’ve made to the applicability of the self-correction program to 415(c) failures involving excess annual additions and where this basically calls for the return of excess deferrals and what the new rev proc does is it extends the timeframe for which this action must occur.

 

Update to the Employee Plans Compliance Resolution System (EPCRS)

The other major component to the new revenue procedure — we’re on slide five now — relates to the expanded availability of reduced fees for certain submissions that are made under the Voluntary Correction Program, or VCP program. This will involve failures to satisfy the required minimum distribution requirements under 401(a)(9), where these distributions are not made in a timely manner, and then certain participant loan failures where the loans did not comply with IRC code section 72(p).

The revenue procedure also mandated that IRS forms will be used for the model VCP submissions. Again, I’ll be talking about that more in a little bit, but basically official forms are replacing some of the attachments that used to be part of the EPCRS revenue procedure. And then the other thing that this revenue procedure did, this 2015- 27, is it made a few miscellaneous changes addressing some typos and some clarifications. And we’ll spend some time talking about those as well.

So the first major topic that’s discussed in Revenue Procedure 2015-27 relates to plan overpayments. And the existing rule that’s in Revenue Procedure 2013-12 basically says the plan, you know, should be if it makes an overpayment to a participant it should recover the overpayment. And the corrective actions generally include the plan taking reasonable steps to have the overpayments further adjusted for interest returned by the participants. Notice the words “reasonable steps.” What we found out when we were drafting this revenue procedure was there was some confusion about what all this means.

 

VCP program

If certain conditions can be met it may be permitted, under the VCP program, for the plan sponsor to retroactively amend the plan to conform to the way the plan operated through the use of a special retroactive amendment. Again, this can only be done under VCP, and certain conditions have to be met. We can talk about that, but basically it’s got to be a payment that the plan could have made but was couldn’t, you know, because the plan did not authorize it, but would otherwise have been permitted by the tax code.

And when you come up with these alternative correction proposals, which do not necessarily involve going after the affective participants who receive the overpayment, you know, you have to look at the other correction principles that are in EPCRS and take that into consideration. But the key concept is that plan sponsors are not required to go after plan participants to recover overpayments. They have the right to use these other alternatives if they make sense for the particular situation. So these changes just make it clear that there are options to how this particular failure can be addressed and that you’re not automatically, as your first course of action, required to go after the plan participant.

In terms of recovering money from plan participants, should there be some limits on reducing future payments to the participant? As most of you should know, one of the options that’s allowed under the EPCRS revenue procedure is that if a participant receives an overpayment and they’re in annuity status, and they’re getting subsequent payments, you can try and recovery the payments by reducing the amount of money that they’re going to take from the plan going forward. And one of the things we ask is, well, should we have a limitation, you know, as to how that would actually work?

Right now there is no limitation, so sometimes there can be a dramatic reduction in someone’s pension going forward in an attempt to recover some past overpayments that they may have received, perhaps due to a calculation error. For instance, the PBGC, if you look at their regulation that’s cited on the slide here, if they make a calculation error involving a plan that they’ve taken over, they can only recover generally. They can only reduce future payments by up to 10%. So they would — you know, so it’s the effect on future retirement payments is not as severe if we were to adopt a rule like the PBGC. And the question is should we? Should we?

Do we need to provide some details as to how interest on overpayments should be calculated? The Rev Proc right now is a little vague on that. And we’re asking if we should provide some additional guidance in this and what should it say? And then, you know, are there situations where it would be reasonable for the plan or plan sponsor not to recruit the money from anybody? So the comment period for submitting comments on this recruitment idea expired on July 20th, but I can let you know that if you want to submit something there’s still time to do so. Just follow — you can either send a letter or send an email. The revenue procedure has the specifics about how to submit comments. But if you can get those in as soon as possible, we would appreciate it. I think in terms of crafting, you know, reasonable policies and procedures to deal with this, getting input from taxpayers, you know, is quite valuable and leads to a better product. So if you have an opinion on some of this stuff, please feel free to make a submission — or make a comment to the IRS on that.