IRS Issues Corrections Program Update

The Internal Revenue Service (IRS) released an in-depth rewrite of its correction programs for retirement plan sponsors who have not complied with tax laws for a period of time.

The 179-page Revenue Procedure 2008-50 applies to the three-part Employee Plans Compliance Resolution System (EPCRS), made up of the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP).

According to the IRS, the changes:

  • clarify that in particular cases the IRS may decline to make available one or more correction programs under EPCRS in the interest of sound tax administration;
  • expand the scope of the SCP by liberalizing the requirements for determining whether there was substantial completion of correction as of the first date the plan or plan sponsor is considered to be under examination;
  • expand the correction method for a failure to include an eligible employee in a 401(k) plan to include a situation in which elective deferral and after-tax employee contribution elections are not implemented by the employer or are implemented in a manner inconsistent with the plan’s terms;
  • add a factor to be considered in the determination of whether a correction method is reasonable and appropriate, requiring consideration of corrections of violations that are similar to the failure being addressed by other government agencies;
  • provide that if the total corrective distribution due a participant or beneficiary is $75 or less, the plan sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution;
  • clarifiy the treatment of amounts improperly distributed to participants and beneficiaries under the plan which are rolled over to IRAs; and
  • expand income and excise taxes that the IRS may exercise discretion to not pursue.

The IRS release is available here.