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Compliance Corner
November, 2014

IRS Updates and Improves EPCRS
On December 31, 2012, IRS issued its  update to the Employee Plans Compliance Resolution System, or “EPCRS” (Rev. Proc. 2013-12), effective April 1, 2013. EPCRS is the IRS’ comprehensive system of correction programs that are available to sponsors of qualified retirement plans that have suffered one or more qualification failures.  An abbreviated checklist for 401(k) plans was formulated by the IRS at "www.irs.gov/pub/irs-pdf/p4531.pdf" .Failure to follow the terms of the plan document can potentially lead to plan disqualification upon IRS audit. The above checklist, and the EPRS program, can assist plan sponsors in avoiding such errors and correcting them timely and effectively, if and when they occur. Otherwise, the potential consequences of plan disqualification can be severe.

Under the EPCRS program, there are three (3) protocols to correct mistakes in plan administration: 1). Self Correction (SCP), 2). Voluntary Correction Program (VCP), and 3). Audit Closing Agreement Program (Audit CAP).

     Self-Correction Program: Allows a plan sponsor to correct certain insignificant, and some significant, plan failures without contacting the IRS, or paying a fee.

     Voluntary Correction Program: Provides the plan sponsor with a protocol for correcting plan errors, before becoming under audit, as long as the sponsor pays the requisite user fee, and receives IRS approval for correction of the plan failure(s) disclosed.

     Audit Closing Agreement Program: An alternative to possible plan disqualification, or other penalty, provided the plan sponsor pays a certain error specific monetary sanction, and corrects the plan failure, while the plan is under audit.

A general description of each of these three (3) EPCRS program is noted below:

     Self-Correction Program ("SCP")

          To be eligible for SCP, the plan sponsor must have established practices and procedures reasonably designed to foster overall compliance with the plan's provisions, the applicable statutes, and underlying regulations. If needed, the plan sponsor should make changes to its administrative procedures to ensure that the mistakes do not recur.  SCP is available for correcting operational plan errors only, not failures to amend and/or restate the documents timely.

          The plan sponsor should follow the general correction principles in IRS Revenue Procedure 2013-12, section 6.

          The plan sponsor may correct "insignificant" errors at any time before audit, and "significant" errors (also before audit) generally within 2 years of the plan defect. The criteria for distinguishing "insignificant" from "significant" errors are primarily facts and circumstances such as: the amount and/or percentage of plan assets involved, the number of plan years in which the error(s) occurred, the number of affected plan participants, the timeliness of the correction, and the reason for the failure.

     Voluntary Correction Program ("VCP")

          To be eligible for VCP, the plan sponsor must complete and submit  Form 8950, Form 8951, identify the mistake(s), and the proposed correction(s) under the general correction principles in Rev Proc 2013-12, section 6.

          In addition, the plan sponsor should make the necessary changes to its administrative procedures to ensure that such errors do not recur.

          The plan sponsor, must in addition to correcting the plan error, must pay a compliance fee to the IRS.

          The plan sponsor should make the indicated corrections to the listed errors within 150 days of the issuance of the IRS Compliance Statement.

          During the processing of the VCP, the plan sponsor will not audit the plan, except under unusual circumstances.

     Audit Closing Agreement Program ("Audit CAP")

          To be eligible for Audit CAP, the plan sponsor will usually be under audit.

          The IRS will propose a corrective sanction that is a negotiated percentage of the maximum payment amount, "(MPA'). This MPA is the approximation of the consequences of a potential plan disqualification based on all open taxable years.

          The plan sponsor, if it agrees to the terms of the compliance statement, will pay the sanction fee. Please note, this sanction fee will generally be greater than the compliance fee under the VCP program.    

This newest EPCRS procedure, while still long and quite detailed, continues the significant simplifications offered in its predecessors.  This latest EPCRS release essentially constitutes a sensible and coherent procedural manual for practitioners and plan sponsors to follow, while expanding it to SARSEPs, and 403(b) plans.

Important Provisions. The new EPCRS includes several characteristics  worth noting:

  • A single fee schedule, for all voluntary submissions, simplifies the application process. The fee schedule is based strictly upon the number of plan participants. The graded schedule starts at $750 for a plan of up to twenty participants; other scheduled fees are $1,000 for up to 50; $2,500 for up to 100; $5,000 for up to 500; $8,000 for up to 1,000. Larger plans would pay more: $15,000 for up to 5,000 participants; $20,000 for up to 10,000, and a cap at $25,000 after that.
  • If a non-amender  files for correction within the first year after the plan’s remedial amendment period has expired, the fee would be one-half of the scheduled amount.
  • Group submission procedures have been streamlined, so that TPA firms and other service providers can correct numerous plans in a single submission.
  • Preparation of submission has been made simpler by reducing the amount of paperwork required in the packages. Also, the new release continues the practice of including sample formats for practitioners to use in making EPCRS submissions.
  • The new EPCRS is not without many notable changes. These changes included: employer corrective contributions for improperly excluded employees in a 401(k)/defined contribution plan, corrective distributions from a pension plan, and locating missing participants in either a defined contribution or defined benefit plan(s). For a complete list of all significant changes to this EPCRS program, please consult "www.irs.gov/pub/irs-tege/rp13_12_changes_chart.pdf" .
  • The EPCRS standards for self-correction are continued, where an IRS submission is not required. Similarly, the explanations of the acceptable corrective techniques (to determine the amounts of corrective contributions and earnings for operational failures) remain the same for the most part. Again, the thrust of this latest release is the new simplicity in the filing of voluntary submissions, and Rev. Proc. 2013-12 will serve as a useful operations manual for such submissions.

More User-Friendly. IRS has gone to great length to simplify EPCRS and construct a  straightforward, comprehensive, instruction manual for the correction of plan qualification failures.

 
 
 
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