Navigating EPCRS

By John Ortman • October 25, 2016 • 0 Comments
How many of your plan sponsor clients make zero mistakes? 

Just kidding, of course. We all know there’s only one answer to that question: None. Which is essentially why the IRS created the Employee Plans Compliance Resolution System (EPCRS) to correct mistakes in plan administration.

At an EPCRS workshop session Oct. 25, Jewell Lim Esposito, Esq., a principal at the Jackson Lewis law firm, and Adam Pozek, a partner at DWC ERISA Consultants, provided a concise overview of the program and offered tips on using it smartly and successfully.

IRS Revenue Procedure 2016-51, issued Sept. 29, sets forth the current full version of EPCRS, incorporating into Rev. Proc. 2013-12 two subsequent Rev Procs from 2015 and one from 2016. Rev. Proc. 2016-51 also clarifies the interaction of EPCRS and the recently modified determination letter program, Pozek noted.

There are four basic types of failures that can be corrected under EPCRS:

  • Operational (e.g., not following the terms of the plan document)
  • Plan document (i.e., it includes something it shouldn’t or lacks something that should be included)
  • Employer eligibility (i.e., a plan is offered by an employer not authorized to sponsor that type of plan)
  • Demographic (e.g., nondiscrimination, coverage, etc.)
EPCRS consists of two programs: the Self-Correction Program (SCP) and the Voluntary Correction Program (VCP).

Self-Correction Program

The SCP is for operational failures only. No formal submission to the IRS is required, and it can be used while an IRS examination is taking place. The program is available for a limited duration, depending on the significance of the failure. In determining what constitutes a “significant” failure, the IRS looks at:

  • The existence of other failures;
  • The percentage of plan assets and/or contributions involved;
  • The percentage of participants affected;
  • The duration of the failure; the reason for the failure; and
  • Timeliness of correction after the failure is discovered.
In addition, correction made be made by retroactively amending the plan, but in very limited circumstances: fixing early entry by otherwise eligible employees, adding plan loans, and adding hardship distributions.

Voluntary Correction Program

The VCP is for violations big enough or old enough (e.g., a prohibited transaction or fraudulent activity) that the VCP is not available, Pozek noted. All failure types are eligible. The VCP is available for an unlimited duration, but not when an IRS examination is underway. A formal application must be made to the IRS.

Under the VCP, correction by plan amendment is permitted, subject to cutback restrictions.

There is a third, related, IRS program that comes into play, Pozek noted: the Audit Closing Agreement Program, or “Audit CAP,” which essentially consists of negotiating a penalty with the IRS.

Correction Principles

In general, corrections made under EPCRS should:

  • Restore the plan to the position it would have been in had the error not occurred;
  • Resemble pre-approved methods;
  • Keep assets in the plan;
  • Provide benefits to NHCEs;
  • Not violate other rules; and
  • Be consistent and complete.

Streamlined corrections are allowed for certain common failures involving:

  • Non-amenders
  • Loan failures
  • RMD failures
  • SEPs and SIMPLEs
The VCP also features an anonymous, “I have a friend who…” program, and group submissions are permitted.

User fees under the VCP were lowered earlier this year, and now range from $500 for plans with 20 or fewer participants to $15,000 for plans with more than 10,000. A range of discounts are available as well.

Corrections for Common Failures

Esposito and Pozek offered some tips on steps to take to correct three of the most common errors:

Uncorrected ADP/ACP Failures

  • Re-run the tests without using the “otherwise excludable” rule, then either:
  • Make QNECs; or
  • Use a one-to-one correction method to provide refunds and provide QNECs to actively employed NHCEs equal to the refund amount.

Missed Deferral Opportunity

When the correct deferrals were not withheld, take these correction steps:
1. Determine how much participant would have deferred
2. Calculate QNEC
3. Calculate missed match
4. Adjust items 2 and 3 for investment gains

5. Deposit into the participant’s account

Calculating the QNEC

The QNEC calculation depends on timing of correction and notice:

  • Within 3 months: 0%
  • Within 2 plan years: 25%
  • More than 2 plan years: 50%
For automatic enrollment plans, no QNEC is needed if correct deferrals begin no later than 9-1/2 months following the close of the plan year.

Esposito and Pozek also shared three other important things to keep in mind:

  • Determine scope of correction effort first
  • Set clear expectations with clients regarding timing, fees and alternatives for correcting
  • Document any corrections in the service agreement





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