On April 19, 2019, the IRS released Rev. Proc. 2019-19, which expanded the types of plan qualification failures that can be corrected under the Self-Correction Program (SCP), a component of the Employee Plans Compliance Resolution System (EPCRS). SCP allows certain types of disqualifying defects to be corrected without the need for an IRS filing or payment of a user fee. This new guidance expanding the SCP is effective immediately and may provide plan sponsors with new means to address plan operational errors, plan document failures, and plan loan failures.
Plan Operational Errors
Mistakes are often made with regard to operating the plan in accordance with its written terms. These operational mistakes can result in participants receiving higher benefits than were called for under the terms of the plan. If the plan sponsor is willing to provide for the higher benefit this type of mistake can now be corrected through a retroactive conforming amendment, provided that the following three conditions are satisfied:
- The amendment results in the increase of a plan benefit, right, or feature;
- The increased benefit, right, or feature is available to all eligible employees; and
- The increased benefit, right, or feature is permitted under the Internal Revenue Code and satisfies the principal requirements for correction under EPCRS.
It should be noted that self-correction for this type of failure only applies to errors that are deemed “insignificant” by the IRS and the period to correct generally ends the last day of the second plan year following the plan year for which the failure occurred.
Plan Document Failures
In the past, failure to timely amend a plan document for changes in the law or regulations could only be corrected by filing a Voluntary Correction Program (VCP) application and paying a user fee (unless the correction was made during an IRS audit). The new procedure will now permit self-correction by retroactively adopting the required amendment. This self-correction approach is only available if the plan has a favorable determination letter or, for a pre-approved plan, a favorable opinion or advisory letter for the most recent expired six-year remedial amendment cycle. In addition, the corrective amendment must be adopted no later than the close of the second plan year following the plan year in which the amendment should have been adopted.
Plan Loan Failures
Rev. Proc. 2019-19 expands plan sponsors’ ability to correct certain plan loan failures under SCP, including:
- A retroactive amendment to increase the number of outstanding loans available to a participant where the plan operation allowed the participant to exceed the limit;
- Self-correction of a failure to obtain spousal consent prior to a loan distribution;
- Correction of a defaulted loan either through re-amortization of the loan balance, or by a lump sum payment of the balance by the participant (or a combination of both); and
- Deemed distributions may now be reported on a Form 1099-R in the year of correction instead of the year of failure.
As with any other self-correction, plan sponsors must evaluate whether the loan failure is an “insignificant” failure that can be corrected at any time or a “significant” failure that must be corrected within 2 years of the failure under SCP.
For more information about McKonly & Asbury’s Employee Benefit Plan services, or for questions regarding this article, please contact Stephanie Kramer, Supervisor with McKonly & Asbury, at email@example.com.