For the first time since 2019, the IRS has updated its guidance on methods that an employer can use to correct defects in its retirement plans. Rev. Proc. 2021-30 replaces Rev. Proc. 2019-19 and generally became effective July 16, 2021. The updates reflect a significant liberalization of the prior rules in the following areas:
- The Self Correction Program (SCP) will now be available for significant errors corrected by the end of the last day of the third plan year (instead of the second) following the plan year for which the failure occurred.
- Effective January 1, 2022, allows a no-fee, anonymous pre-submission conference before a Voluntary Correction Program (VCP) submission is made to the IRS. (However, VCP submissions themselves can no longer be anonymous as of that date.)
- Allows a plan not to seek return of overpayments of less than $250. (The previous limit was $100.) Moreover, the plan can recoup overpayments through an installment agreement or a reduction of future benefits as opposed to just a lump sum repayment. In the case of a defined benefit plan, no recoupment of overpayments at all may be required, depending on the plan's funding level.
- Extends the provision for correcting elective deferral failures in automatic contribution plans. The provision allows such failures to be corrected without requiring the employer to make qualified nonelective contributions for missed elective deferrals if the failure is corrected within the first 9½ months of the plan year following the plan year of the failure. (Any missed matching contributions must be made.) The provision had expired on December 31, 2020 but has now been extended to December 31, 2023.
- Expands the use of retroactive amendments to correct operational failures under SCP. This correction method is now available if the plan amendment would result in an increase of a benefit, right, or feature, as long as the amended plan provisions would not violate some other provision of the Internal Revenue Code. The prior requirement that all participants in the plan benefit by the retroactive amendment has been eliminated.
Given the complexity of the rules governing retirement plans, errors are common. The updates to EPCRS are welcome changes that will increase the ability to self-correct errors. We are also following various legislative proposals that would further liberalize plan self-correction rules.
If your organization discovers operational or document errors relating to its plans and wants to avoid the significant tax penalties associated with a plan that is out of compliance, please contact the authors of this alert or any other attorney in Venable's Employee Benefits and Executive Compensation Group.