Contributing Author: Yesha H. Patel, Esq.

The Internal Revenue Service (IRS) offers programs and related mechanisms for plan sponsors to correct plan qualification failures or defects and thereby avoid substantial penalties for their failure to comply with the tax-qualification requirements outlined under Section 401(a) of the Internal Revenue Code (“Code”). One of the correction mechanisms set forth by the IRS is the Employee Plans Compliance Resolution Systems (EPCRS), which was most recently revised and restated in the Revenue Procedure 2021-30 (Rev. Proc. 2021-30).

EPCRS offers the following three programs for plan sponsors to use to correct plan failures and avoid the consequences of plan disqualification:

1. Self-Correction Program (SCP) – permitting plan sponsors to correct plan failures without seeking IRS approval or paying a fee.
2. Voluntary Correction Program (VCP) – permitting plan sponsors to disclose plan defects to the IRS and identifying proposed methods of correction via a written application, paying an application fee, and obtaining IRS written approval of agreed-upon corrective actions.
3. Audit Closing Agreement Program (Audit CAP) – permitting plan sponsors to pay a negotiated monetary sanction and correct a plan failure while under audit.

Under the current version of the EPCRS (Rev. Proc. 2021-30), the SCP permits a plan sponsor to self-correct minor operational failures at any time; however, significant operational and plan document failures must be self-corrected by the last day of the third plan year following the plan year in which the failure(s) occurred.

In order to be eligible for SCP, EPCRS requires plan sponsors to have established practices and procedures which aim to promote and facilitate compliance with the Code. Additionally, correction of significant plan failures through SCP must be made within certain timeframes; otherwise, eligible correction may only be accomplished thought submission of a VCP application to the IRS. Thus, a plan sponsor must perform self-corrections in accordance with the principles and rules outlined within EPCRS. Certain failures such as certain plan document and participant loan failures, and employer eligibility and demographic failures, are not eligible for self-correction under SCP and therefore can only be corrected via a VCP application. 

Expansion of SCP Under the SECURE 2.0 Act 

Except as otherwise provided in the Code, regulations, or other IRS guidance, SECURE 2.0 allows for self-correction of “eligible inadvertent failures” under the EPCRS, so long as (1) the failure is not first identified by the IRS and (2) the self-correction is completed within a reasonable period after the failure is identified. It sets no particular deadline to self-correct an “eligible inadvertent failure” and advances that self-correction is proper when the failure is discovered rather than when it occurs. It further instructs the IRS to revise Rev. Prov. 2021-30, or any successor guidance, to issue specific guidance on correction methods for “eligible inadvertent failures.”  

IRS Notice 2023-43

On May 25, 2023, the IRS issued Notice 2023-43, providing interim guidance on the expansion of self-correction under SECURE 2.0 prior to its revision of Rev. Proc. 2021-30. The Notice outlines certain conditions which plan sponsors must satisfy prior to any self-correction of “eligible inadvertent failures.” Per the Notice, a plan sponsor may self-correct an “eligible inadvertent failure” if the following conditions are satisfied:

1. The failure was not identified by the Secretary prior to any actions demonstrating a specific commitment to implement a self-correction with respect to the failure.
2. The self-correction is completed within a reasonable period after the failure was identified.
3. The failure is not egregious, as described in section 4.10 of Rev. Proc. 2021-30, does not directly or indirectly relate to an abusive tax avoidance transaction, as described in section 4.12(2) of Rev. Proc. 2021-30, and does not relate to the diversion or misuse of plan assets. 
4. The self-correction satisfies all of the provisions applicable to self-correction set forth in Rev. Proc. 2021-30 (other than the provisions listed in Q&A-3 of the notice), including that:
   1. A plan sponsor must have established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Code requirements, as described in section 4.04 of Rev. Proc. 2021-30;
   2. A plan sponsor must apply the correction principles and rules of general applicability set forth in section 6 of Rev. Proc. 2021-30;
   3. A plan sponsor may, but is not required to, self-correct using a correction method set forth in Appendix A or B of Rev. Proc. 2021-30 (and correction methods described in Appendices A and B are deemed to be reasonable and appropriate methods of correcting a failure); and
   4. A plan sponsor may not use a correction method that is prohibited under Rev. Proc. 2021-30.

While plan sponsors await updates to the EPCRS, they may rely on IRS Notice 2023-43 to address and correct any outstanding failures. It is crucial however that any outstanding failures are corrected using a self-correction method that is permissible under EPCRS and specifically addressed by Notice 2023-43, as failing to do so may put your plan out of compliance.

If you have any questions about compliance failures with respect to your retirement plan or self-correction methods permitted under the EPCRS, contact the attorneys at Butterfield Schechter LLP for more information. Our attorneys have extensive experience counseling and assisting plan sponsors through the EPCRS program.