The IRS has just issued a new revenue procedure, Rev. Proc. 2021-30, which limits the number of plans that have to make IRS filings under the Voluntary Correction Program (“VCP”) in order to correct past errors.
The guidance expands the Self-Correction Program (“SCP”), which does not require an IRS filing, in two ways:
- Significant operational failures: The correction period for self-correction of significant operational failures is extended from two to three years.
- Retroactive plan amendments: The revenue procedure removes the requirement that all participants in the plan benefit from the retroactive amendment, making it easier to use retroactive plan amendments to correct operational failures under SCP.
The revenue procedure also adds new options with regard to correction of overpayments.
Plan Document Failures
For plan document failures, the general rule is that SCP can be used only if:
- the plan is subject to a Favorable Letter and
- the correction is made within the SCP correction period.
In the case of an individually designed plan, “Favorable Letter” means a favorable determination letter with regard to the plan, no matter when it was issued. In the case of a pre-approved plan, it means a favorable letter that is still current. If the plan was terminated in the middle of a pre-approved plan cycle, the plan must have been amended to reflect the qualification requirements that applied as of the date of termination.
Extension for Period for Correction of Significant Operational Failures
The SCP correction period now generally extends to the last day of the third plan year following the plan year for which the failure occurred, unless the IRS commences an examination of the plan before then. For example, if a calendar year plan document failure occurred in 2017, the sponsor would need to correct the problem by the end of 2020.
Correction by Retroactive Plan Amendment
The rules for correction by plan amendment have been loosened by the revenue procedure. Such correction is appropriate in instances in which a plan was not operated in accordance with its terms. Such an operational failure may be corrected under SCP by an appropriate plan amendment if three conditions are satisfied:
- the plan amendment would result in an increase of a benefit, right, or feature,
- the increase in the benefit, right, or feature is available to all eligible employees, and
- providing the increase in the benefit, right or feature is permitted under the Code.
Prior to the revenue procedure,
For example, suppose that a plan provided only for a lump sum benefit, but had been permitting any participant to elect installment payments over five years. The installment payments would not themselves have been objectionable, but in the absence of a correction, they would violate the rules that a plan must be operated in accordance with its terms. The plan sponsor could simply elect to amend the plan retroactively under SCP to permit the installment payments.
Prior to the revenue procedure, retroactive amendments could be used as a correction method only if all participants in the plan benefitted from the retroactive amendment. The revenue procedure removes this requirement.
Flexibility in Dealing with Overpayments
The revenue procedure adds three new methods of dealing with overpayments:
- Funding Exception Correction Method. If the plan’s funding level is sufficient (determined at the time of correction), it’s not necessary to recover overpayments from the plan sponsor or the individual who received the overpayment if certain conditions are met.
- Contribution Credit Correction Method. Contribution credits are applied to reduce the amount of the overpayment (determined without interest) that needs to be repaid to the plan.
- Modify the return of overpayment & adjustment of future payments correction methods. The recipient of the overpayment can be permitted the option to repay the overpayment in installments.
The new revenue procedure should limit the situations in which plan sponsors are required to file under VCP.