IRS Makes Significant Changes and Revisions to EPCRS

The IRS issued new self-correction guidance with the release of Revenue Procedure 2021-30. The new guidance expands self-corrections of plan operational failures through plan amendments, extends the safe harbor correction method for missed deferrals for plans with automatic contribution features, and increases the de minimis threshold on when failures have to be corrected.

Period For Self-Correction

The period for self-correction for significant failures has been changed to the last day of the third plan year following the plan year the failure occurred. For example, if significant failure happened in April 2020 for a plan with a plan year end of December 31, the plan sponsor has until December 31, 2023 to self- correct the significant failure. After December 31, 2023, the plan sponsor would need to submit the correction to the IRS and pay a fee.

Plan Amendments to Self-Correct Operational Failures

Prior to this revenue procedure, plan amendments to correct operational failures were only allowed if the amendment increased the benefit, rights or features to all participants. This is no longer a requirement to amend a plan using self-correction to fix an operational failure.

De Minimis Threshold for Correction of Certain Transactions

The de minimis threshold to correct the following transactions has increased from $100 to $250.

1) Overpayment of funds distributed to a participant or beneficiary.

2) Excess amounts allocated to participants above plan and statutory limits. However, amounts above statutory limits, including investment returns, are not eligible for favorable tax treatment.

Safe Harbor Correction for Certain Missed Elective Deferrals

The safe harbor correction for plans that have automatic contribution features has been extended until December 31, 2023. Under safe harbor correction, plan sponsors will not need to make a QNEC for missed deferrals if the following criteria is met.

• The failure to implement a deferral election does not extend beyond the earlier of 9 ½ months after the end of the plan year of the failure or the first payroll paid date of the month following the Plan Sponsor was notified of the failure.
• Notification of the failure is given to the affected participant no later than 45 days after the correct deferrals began. The notification must include the percentage of eligible compensation that should have been deferred, the approximate date deferrals should have started, statement appropriate deferrals have begun or will begin shortly, statement the missed match has been or will be made, statement the affected participant may increase their deferral percentage to make up for the missed deferral opportunity subject to contribution limits, and the name of the plan and the plan contact information.
• The Plan Sponsor makes a contribution of 100% of any missed match, plus earnings due to the failure.

Overpayment Corrections for Defined Benefit Plans

• The funding correction method and the contribution credit method are two correction methods for overpayment to participants for a defined benefit plan.
• Funding Exception Correction Method: For defined benefit plans that have an adjusted funding target attainment percentages (“AFTAP”) of at least 100%, corrective payments from the plan sponsor or the participant are not required when overpayments to the participants are discovered. Any future payments to the participants, must be reduced to the correct benefit payment amount.
• Contribution Credit Correction Method: The amount of overpayments required to be repaid to the plan is reduced by a contribution credit that is calculated by an actuary but cannot be reduced below zero. If overpayment exists after the contribution credit, the Plan Sponsor or another party must reimburse the plan for the reminder of the overpayment.

Still have questions about the recent IRS changes to the EPCRS? Our Employee Benefit Plan team is here to help.