Background

The IRS’s Employee Plans Compliance Resolution System (EPCRS) provides plans with permissible methods for correcting plan mistakes to avoid disqualification of the plan. The rules of EPCRS, which are currently in Revenue Procedure 2021-30, limit self-correction to insignificant errors and some significant errors corrected within three years.

Section 305 of SECURE 2.0 expands a plan’s ability to self-correct “inadvertent” errors and instructs the IRS to revise the EPCRS by December 29, 2024 to reflect SECURE 2.0. Plans may apply SECURE 2.0’s self-correction provisions as of December 29, 2022. They do not need to wait under the IRS revises the EPCRS.

Under SECURE 2.0, a plan sponsor may correct an “eligible inadvertent failure,” which is a failure that occurs despite the plan maintaining required practices and procedures, specified in EPCRS, except to the extent the failure is identified by the IRS as ineligible for self-correction. (We summarized this and other SECURE 2.0 provisions in our January 4, 2023 insight, “SECURE 2.0 Retirement Reform Becomes Law.”)

The interim guidance

Notice 2023-43 provides rules plan sponsors may follow in the interim period before the IRS revises the EPCRS Revenue Procedure. For actions completed after the enactment of SECURE 2.0 (December 29, 2022) and before the Notice was issued (May 25, 2023), the plan may rely on a good-faith, reasonable interpretation of SECURE 2.0’s self-correction provisions.

These interim correction rules apply to failures that occurred before the December 29, 2022 enactment date of SECURE 2.0, as well as those that occurred after that date (Q8).

Conditions for self-correction

The interim guidance sets forth these conditions for self-correction of “eligible inadvertent errors”:

• The plan sponsor demonstrates a “specific commitment” to implement a self-correction with respect to the failure prior to any IRS actions (Q1). An eligible inadvertent failure is treated as having been identified by the IRS when a plan or plan sponsor comes “under examination” unless the plan has, before the examination, demonstrated a specific commitment to self-correction (Q4). The “under examination” prohibition does not apply to insignificant failures (Q5). Whether a specific commitment to self-correction has been demonstrated is a facts-and-circumstances test (Q6).
• The self-correction is completed within a “reasonable period” after the failure is identified (Q1). Whether correction has been made within a reasonable time is also a facts-and-circumstances test (Q7). Correction within 18 months will generally be reasonable, except that a six-month reasonableness standard applies to an employer eligibility failure plus the requirement that the plan sponsor ceases all contributions to the plan as soon as reasonably practicable after the failure is identified (Q7).
• As described in the EPCRS, the failure is not egregious, does not relate to an abusive tax avoidance transaction and does not relate to the diversion or misuse of plan assets (Q1).
• The plan has established practices and procedures that are reasonably designed to promote and facilitate compliance (as specified in the current EPCRS Revenue Ruling) (Q1).
• The plan applies the EPCRS correction principles, including those in EPCRS Appendices A and B, and does not use a correction method that is prohibited under EPCRS (Q1).

Eligible inadvertent failures that may not be self-corrected at this time (Q2)

The interim guidance clarifies that these eligible inadvertent failures may not be self-corrected unless EPCRS is revised to allow correction:

• Initial adoption of a written plan
• A failure in an orphan plan
• A significant failure in a terminated plan
• A demographic failure other than a correction using a method allowed in the forfeiture regulations
• An operational failure using a method less favorable to a participant or beneficiary than the original terms

EPCRS conditions that will not apply under the interim guidance (Q3)

Under the interim guidance, these conditions for self-correction will not apply:

• The requirement that a plan have a favorable determination letter
• The prohibition of self-correction of demographic failures and employer eligibility failures
• The prohibition of self-correction of certain loan failures
• The provisions relating to self-correction of significant failures that have been substantially completed before examination
• The requirement that a significant failure must be corrected, in most cases, within the third plan year following the year of the failure

Other rules

Self-correction does not apply, however, to waivers of excise or additional taxes, even if the failure is self-corrected. A voluntary corrections procedure (VCP) submission or voluntary closing agreement procedures is needed for those waivers (Q9). VCP submissions may still be submitted even if self-correction is permitted, including for a loan failure (Q10). The existing recordkeeping requirement (being able to provide documentation on request) applies (Q11).

Request for comments

The IRS requests comments on the interim guidance and any other aspects of SECURE 2.0 self-correction provisions. In particular, the IRS is interested in possible additional correction methods and principles of correction for methods not specified.

Comments are requested on or before August 23, 2023.

Action items

The changes made by SECURE 2.0 provide plan sponsors with increased opportunities to self-correct plan mistakes. Notice 2023-43 places some restrictions on self-correction but still leaves the self-correction rules much broader than under the current EPCRS Revenue Procedure. Plan sponsors now have a much less costly method for correction and may want to examine their plans for mistakes that should be corrected.