May 2023 Compliance News

SECURE 2.0 Guidance Issued for EPCRS

The Internal Revenue Service (IRS) issued Notice 2023-43 (The Notice), which provides interim guidance related to the expansion of the Employee Plans Compliance Resolution System (EPCRS) provided in Section 305 of the SECURE 2.0 Act of 2022 (SECURE 2.0).

Background

EPCRS provides a system of correction programs for plan sponsors to correct plan errors. Correction programs include:

Self-Correction Program (SCP), which allows plan sponsors to correct certain plan failures without payment of a fee or facing any sanctions, if certain conditions are met. Generally, corrections must be completed by the last day of the third plan year in which the error occurred.
Voluntary Correction (VCP) program, where plan sponsors who are not under examination may pay a limited fee and seek/receive the IRS’s approval of a plan failure correction.
Audit Closing Agreement Program (Audit CAP), which allows plans that are under examination to correct certain plan errors and pay a sanction.

Section 305 of SECURE 2.0 expanded the three-year timeline provided under SCP to generally an indefinite correction period for “eligible inadvertent failures” that occur despite the existence of practices and procedures that satisfy the standards set forth in EPCRS. Failures that are considered egregious, divert or misuse plan assets, or relate directly or indirectly to an abusive tax avoidance transaction are not eligible for SCP.

Clarification

Notice 2023-43 provides that the changes outlined in Section 305 of SECURE 2.0 must satisfy these EPCRS provisions in order to qualify for SCP:

The plan sponsor must have established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Code requirements;
The plan sponsor must apply the correction principles and rules of general applicability set forth in section six of EPCRS;
The plan sponsor has the option to self-correct using a correction method set forth in Appendix A or B of EPCRS; and
A plan sponsor may not use a correction method that is prohibited under EPCRS

The Notice also lists several types of inadvertent failures that would not qualify for SCP, including:

A failure to initially adopt a written plan.
A failure in an orphan plan.
A significant failure in a terminated plan.
A failure that involves excess contributions to a SEP or SIMPLE IRA plan and that is corrected by permitting the excess contributions to remain in an affected participant’s IRA.
A demographic failure that is corrected using a method other than one set forth in Treasury Regulations.
An operational failure that is corrected by a plan amendment that conforms the terms of the plan to the plan’s prior operations in a manner that is less favorable for a participant than the original terms of the plan.
A failure in an ESOP that involves Section 409, in which tax consequences other than plan disqualification are associated with the failure.
Certain document failures for SEP or SIMPLE IRA plans.

The IRS also clarified that SCP cannot be used to correct errors identified by the IRS unless the employer can demonstrate that they had already made a specific commitment to correct the failure. The self-correction must also be completed within a reasonable time frame after the failure is identified.

Plan sponsors may rely on the guidance provided in The Notice until EPCRS is updated. Self-correction of eligible inadvertent failures can be used for errors occurring before SECURE 2.0 was enacted on December 29, 2022.

Public Comments

The US Treasury Department and the Internal Revenue Service are seeing public comments, particularly in regard to:

Additional correction methods that are required to be used to correct eligible inadvertent failures, including general principles of correction if a specific correction method is not specified by the Secretary; and
A description of common IRA failures and suggested correction methods for those failures, and the possibility of expanding EPCRS to be available for both IRA custodians and IRA owners.

Comments should be submitted on or before August 23, 2023 via the Federal eRulemaking Portal at www.regulations.gov or by mail at:

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2023-43), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Be sure to reference Notice 2023-43 when submitting public comments.

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