The rules regarding the proper administration of retirement plans are extensive and complex. Plan sponsors are going to make some missteps along the way, so the IRS’s Employee Plans Compliance Resolution System (EPCRS) provides several options to remedy mistakes and avoid plan disqualification. Fortunately, the IRS has made some changes to the system that should make it easier to correct certain errors.

Corrections to Overpayments to Participants

When a participant receives an overpayment, such as an impermissible withdrawal or a miscalculated benefit, employers have generally been required to take “reasonable steps” to have the overpayment returned. According to the IRS, plans may have interpreted this as requiring a demand for repayment from the participants. The agency noted that some participants, particularly those who are older, might have difficulty meeting these demands.

The IRS has clarified that, depending on the facts and circumstances, overpayment correction may not require requesting return of the overpayment. In such cases, it might be appropriate for the employer to contribute the amount of overpayment (with interest) or to make a retroactive amendment to conform the plan document with the plan’s operation. This flexibility should make it easier to correct overpayments without seeking large payments from participants who likely lack the financial ability to comply.

Corrections to Excess Annual Additions to Accounts

To use the EPCRS’s Self-Correction Program, a plan must have “established practices and procedures” to facilitate compliance with the applicable requirements. Previously, a plan that provided for elective deferrals and non-elective employer contributions that weren’t matching contributions satisfied this requirement if excess annual additions to participant accounts were regularly corrected.

This required the return of elective deferrals to the affected participant within 2.5 months after the plan’s limitation year. The IRS has extended that period to 9.5 months.

Reduced Fees for MRD and Bad Loan Corrections

The IRS has also reduced the compliance fee for correcting minimum required distribution (MRD) failures under the EPCRS Voluntary Correction Program. It increased the number of failures that can be corrected for $500 from 50 to 150 and set a $1,500 fee for 151 to 300 MRD failures. The IRS also significantly cut the fee for certain plans if the VCP submission relates only to plan loan failures and affects no more than 25% of participants.

Additional Changes

The IRS has made other modifications to the EPCRS and is considering comments on how to provide further improvements. Stay tuned for updates. In the meantime, let us know if you have questions about correcting retirement plan errors.