In recent weeks, the IRS has issued two updates to its Employee Plans Compliance Resolution System (EPCRS). EPCRS allows plan sponsors to correct many documentary and operational errors that otherwise might jeopardize a plan’s tax-qualified status through one of three programs: the Self-Correction Program (SCP), the Voluntary Correction Program (VCP) or the Audit Closing Agreement Program (Audit CAP).

On March 27, 2015, the IRS released Revenue Procedure 2015-27, which focuses primarily on correcting plan overpayments, in addition to a number of other minor changes. Several days later, on April 2, 2015, the IRS issued another update to EPCRS. Revenue Procedure 2015-28 contains new safe harbor methods for correcting elective deferral failures. As the first revisions to EPCRS since 2013, these two pieces of guidance are generally favorable for plan sponsors, making it easier (and in some cases, less expensive) to correct common plan failures. The most significant changes relate to:

• Clarifying the process for correcting plan overpayments;
• Reducing VCP fees for required minimum distribution (RMD) and loan failures;
• Clarifying certain VCP requirements related to simultaneous determination letter applications;
• Providing a new method for correcting auto-enrollment failures; and
• Updating procedures for correcting general elective deferral failures.

These updates and clarifications are explained in detail below.

Revenue Procedure 2015-27
Although this new guidance is effective as of July 1, 2015, plan sponsors are free to begin implementing the revisions and updates immediately. Highlights include:

• Correcting Plan Overpayments. Prior to the new guidance, EPCRS required that plan sponsors make a reasonable effort to recover overpayments made to participants. If full repayment could not be obtained, the plan sponsor had to reimburse the plan for those overpayments. Plan sponsors have long noted that corrections requiring repayment from participants are burdensome for both plan sponsors and participants. For example, requesting large repayments could place a significant financial strain on participants, particularly retired participants. Under the new guidance, plan sponsors are no longer required to demand repayment from participants, and instead can choose to make a corrective contribution to the plan or to adopt a retroactive plan amendment allowing for the overpayment (although a retroactive amendment will work only in limited situations). The IRS noted that it will continue to seek comments and evaluate the best methods of correcting plan overpayments.
• Reduced VCP Fees for RMD and Loan Failures. Fees associated with filing a VCP submission vary depending on the type of error and the size of the plan. Previously, VCP submissions involving a failure to distribute RMDs affecting 50 or fewer participants were entitled to a reduced user fee of $500. The new guidance provides for a reduced user fee of $500 if the RMD failure affects 150 or fewer participants and $1,500 if the RMD error affects between 151 and 300 participants. For plan loan failures, the new guidance replaces the 50% user fee reduction with a tiered user fee ranging from $300 to $3,000 based on the number of affected participants.
• VCP Submissions Requiring a Determination Letter. In general, certain VCP submissions containing retroactive amendments must be accompanied by determination letter applications. Revenue Procedure 2015-27 clarifies that this requirement does not apply to prototype and volume submitter plans or if more than twelve months have passed since all plan assets have been distributed in connection with a plan termination. It also extends the period for executing certain corrective plan amendments when a required determination letter application is filed concurrently with a VCP submission.

Revenue Procedure 2015-28
In response to criticism that EPCRS’s method of correcting failures to implement deferral elections (including deemed auto-enrollment elections) provides participants with a windfall and discourages plan sponsors from implementing auto-enrollment arrangements, Revenue Procedure 2015-28 establishes new safe harbor correction methods for elective deferral failures. Prior to this newly issued guidance, a plan sponsor had to make a qualified nonelective contribution (QNEC) equal to 50% of the amount the affected participant would have deferred had his deferral election been properly implemented. The plan sponsor was also required to contribute 100% of the matching contributions the affected participant would have received, plus lost investment earnings.

• Auto-Enrollment Failures: In an effort to encourage auto-enrollment arrangements, the new guidance provides that, through 2020, a QNEC is not required for auto-enrollment failures if:
• Proper deferral elections are implemented before the first pay period that (i) is 9½ months after the end of the year in which the failure first occurred, or (ii) if earlier, on or after the last day of the month after the month in which the affected employee notifies the plan sponsor of the failure; and
• The plan sponsor provides employees with notice of the failure no later than 45 days after the date on which correct deferrals begin.

Under the new safe harbor correction method, participants still must receive the matching contributions they would have received had the auto-enrollment feature been correctly implemented, plus lost investment earnings.

• Other Elective Deferral Failures: The new guidance also includes correction procedures for elective deferrals failures that are unrelated to auto-enrollment. Correction methods differ, depending on the length of the failure.

Failures of Three Months or Less: For elective deferral failures that last less than three months, no QNEC is required if:

• Proper deferral elections are implemented before the first pay period that is (i) three months from the date on which the failure first occurred, or (ii) if earlier, on or after the last day of the month after the month in which the affected employee notifies the plan sponsor of the failure; and
• The plan sponsor provides employees with notice of the failure no later than 45 days after the date on which correct deferrals begin.

Failures of More Than Three Months: For elective deferral failures that last longer than three months, plan sponsors can make a reduced QNEC equal to 25% (rather than 50%) of a participant’s missed deferrals if:

• Proper deferral elections are implemented before the first pay period after (i) the last day of the second plan year following the plan year in which the failure first occurred, or (ii) if earlier, on or after the last day of the month after the month in which the affected employee notifies the plan sponsor of the failure; and

• The plan sponsor provides employees with notice of the failure no later than 45 days after the date on which correct deferrals begin.

Under both correction methods, participants must still receive the matching contributions they would have received had their deferral elections been properly implemented, plus lost investment earnings.