The IRS has issued Revenue Procedure (Rev. Proc.) 2021-30, updating its comprehensive system of correction programs for sponsors of retirement plans.

The Employee Plans Compliance Resolution System (EPCRS) permits plan sponsors to correct plan and operational failures to continue to provide their employees with retirement benefits on a tax-favored basis. The components of EPCRS are the Self Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP).

In summary, the new Revenue Procedure updates Rev. Proc. 2019-19 primarily to:

• expand guidance on the recoupment of overpayments of defined benefit (DB) plan benefits;
• eliminate the anonymous submission procedure under VCP, effective January 1, 2022;
• add an anonymous, no-fee, VCP pre-submission conference procedure, effective January 1, 2022;
• extend the end of the SCP correction period for significant failures by one year (which has the result of also extending the safe harbor correction method for employee elective deferral failures lasting more than three months but not beyond the extended SCP correction period for significant failures);
• expand the ability of a plan sponsor to correct an operational failure under SCP by plan amendment; and
• extend by three years the sunset of the safe harbor correction method available for certain employee elective deferral failures associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a 401(k) plan or 403(b) plan from December 31, 2020, to December 31, 2023.

Correction of Overpayments by DB Plans

The IRS says previous Revenue Procedures clarified the permissible methods for correcting overpayments under EPCRS by noting that, depending on the facts and circumstances, the correction may not need to include requesting that plan participants and beneficiaries return overpayments to the plan. The agency says that based on comments it received from stakeholders, it is further clarifying and expanding options available for the recoupment of overpayments.

Previous guidance is revised to provide that plan sponsors may offer overpayment recipients the option of repaying it in a single sum payment, through an installment agreement or through an adjustment in future payments.

There are also two new overpayment correction methods: the funding exception correction method and the contribution credit correction method. “These methods reduce the need for defined benefit plans to seek recoupment from overpayment recipients and ease the process for overpayment recipients repaying overpayments, while balancing the interest of other participants in the plan,” the IRS says.

Funding exception correction method. This method provides that corrective payments are not required for a plan subject to Internal Revenue Code (IRC) Section 436 funding-based limitations, provided that the plan’s certified or presumed adjusted funding target attainment percentage (AFTAP) that is applicable to the plan at the date of correction is equal to at least 100% (or, in the case of a multiemployer plan, the plan’s most recent annual funding certification indicates that the plan is not in critical, critical and declining, or endangered status, determined at the date of correction). Future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount.

For purposes of EPCRS, no further corrective payments from any party are required; no further reductions to future benefit payments to an overpayment recipient, or any spouse or beneficiary of the recipient, are permitted; and no further corrective payments from an overpayment recipient, or any spouse or beneficiary of a recipient, are permitted.

Contribution credit correction method. This method provides that the amount of overpayments required to be repaid to the plan is the amount of the overpayments reduced by:

• the cumulative increase in the plan’s minimum funding requirements attributable to the overpayments (including the increase attributable to the overstatement of liabilities, whether funded through cash contributions or through the use of a funding standard carryover balance, prefunding balance or funding standard account credit balance), beginning with the plan year for which the overpayments are taken into account for funding purposes through the end of the plan year preceding the plan year for which the corrected benefit payment amount is taken into account for funding purposes; and
• certain additional contributions in excess of minimum funding requirements paid to the plan after the first of the overpayments was made.

This reduction is referred to as a “contribution credit.” Future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount.

For purposes of EPCRS, if the amount of the overpayments is reduced to zero after the contribution credit is applied, no further corrective payments from any party are required; no further reductions to future benefit payments to an overpayment recipient, or any spouse or beneficiary of the recipient, are permitted; and no further corrective payments from an overpayment recipient, or any spouse or beneficiary of the recipient, are permitted.

However, if a net overpayment remains after the application of the contribution credit, the plan sponsor or another party must take further action to reimburse the plan for the remainder of the overpayment.

Explanations of Other Modifications

The new Revenue Procedure eliminate the condition that requires a plan amendment that increases a benefit, right or feature to apply to all participants eligible to participate under the plan.

It also increases from $100 to $250 the threshold for certain inconsequential amounts for which a plan sponsor is not required to implement correction.

The Revenue Procedure extends the end of the SCP correction period for significant failures from the last day of the second plan year following the plan year for which the failure occurred to the last day of the third plan year following the plan year for which the failure occurred.

Effective January 1, 2022, plan sponsors can request a no-fee, anonymous, VCP pre-submission conference under specified circumstances. Also beginning January 1, 2022, Audit CAP sanctions are required to be submitted through the Pay.gov website instead of by certified check or cashier’s check.

The IRS has extended by three years (from December 31, 2020, to December 31, 2023) the sunset of the safe harbor correction method available for certain employee elective deferral failures associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a 401(k) or 403(b) plan.

The Revenue Procedure also identified which plans are eligible for certain correction programs and the effects of examinations. If the plan or plan sponsor is under examination, VCP is not available. The regulation also identifies when SCP is available to a plan that is under examination.