The ABCs of IRS FAQs on EPCRS under SECURE 2.0 

June 6, 2023

Retirement plan sponsors eager to start self-correcting inadvertent errors using the relaxed rules under the SECURE 2.0 Act of 2022 (Div. T. of Pub. L. No. 117-328) will welcome new interim IRS guidance. Notice 2023-43 explains how sponsors may proceed with error corrections under SECURE 2.0’s expansion of the Employee Plans Compliance Resolution System (EPCRS), pending official updates to Rev. Proc. 2021-30, the current version of the EPCRS. Of particular interest, the notice confirms that plan sponsors may rely on the eased rules to correct eligible inadvertent failures that occurred before SECURE 2.0’s enactment on Dec. 29, 2022. Custodians of individual retirement arrangements (IRAs), however, apparently have to wait until the EPCRS is updated. IRS has requested comments on the notice and relevant SECURE 2.0 provisions by Aug. 23.

SECURE 2.0 significantly expands the EPCRS’s Self-Correction Program (SCP) for employer-sponsored retirement plans, letting plan sponsors self-correct any “eligible inadvertent failure” within a reasonable time after discovering the mistake and before Treasury identifies the error. Specifically, the act makes the following changes:

• Extended correction period. The statute states that the correction period for eligible inadvertent failures has no predetermined last day. Under the current SCP, insignificant operational errors have an indefinite correction period, but significant nonegregious errors may be self-corrected only within a limited window. The window generally ends three years after the year of the failure, with an additional year for actual deferral percentage (ADP) and actual contribution percentage (ACP) test violations. (Egregious errors may never be self-corrected.) The notice doesn’t indicate to what extent, if any, the “significant” and “insignificant” labels will be a factor under the SCP after IRS updates the EPCRS.
  
  
• Expanded availability for SEP and SIMPLE plans. SECURE 2.0 allows sponsors of simplified employee pension (SEP) plans and savings incentive match plans for employees of small employers (SIMPLE IRAs) to self-correct eligible inadvertent failures. Under the current EPCRS, SEP plan and SIMPLE IRA sponsors may use the SCP only for insignificant operational errors. (Sponsors of qualified and 403(b) plans may self-correct both insignificant and significant operational errors.)
  
  
• Plan loan errors. SECURE 2.0 expands the SCP to cover eligible inadvertent failures relating to plan loans. Sponsors currently may self-correct only loan errors relating to defaults, spousal consent and loans exceeding the maximum permissible number. The act also requires the Department of Labor (DOL) to treat any loan self-corrected under the expanded SCP as meeting the requirements of the Voluntary Fiduciary Correction Program (VFCP), subject to certain conditions.
  
  
• EPCRS for IRAs. The EPCRS is currently unavailable for correcting errors in IRAs (other than in SEP plans and SIMPLE IRAs), but SECURE 2.0 requires opening the program to IRAs. IRA custodians will be able to self-correct certain eligible inadvertent failures, including waivers of the excise tax on required minimum distributions (RMDs) and certain distributions to nonspouse beneficiaries.

Eligible inadvertent failures include errors occurring despite practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Internal Revenue Code (IRC) requirements. The failure can’t have been egregious, related directly or indirectly to an abusive tax avoidance transaction, or related to the deviation or misuse of plan assets.

Although SECURE 2.0’s deadline for self-correcting errors is indefinite, it isn’t infinite:

• A sponsor generally may not self-correct errors IRS identifies before the sponsor has taken any actions “demonstrating a specific commitment to implement a self-correction” for the failure.
  
  
• The self-correction must be completed within a “reasonable period” after the sponsor identifies the error.

Although Treasury has until Dec. 29, 2024, to update the EPCRS, SECURE 2.0 doesn’t include an effective date for the changes. This left plan sponsors wondering if they could take advantage of the more flexible rules before IRS updates Rev. Proc. 2021-30, and if so, to what extent. Notice 2023-43 says that employers can immediately rely on the expanded program, but IRS limits the errors eligible for self-correction and imposes some conditions and restrictions. However, the notice flatly denies IRA custodians the ability to correct inadvertent failures before the EPCRS is updated.

Sponsors can rely on the expanded EPCRS to correct eligible inadvertent failures except those specifically disallowed in the notice. Corrections generally must satisfy all the applicable self-correction conditions laid out in Rev. Proc. 2021-30. Among those provisions, the sponsor must have established practices and procedures reasonably designed to promote overall IRC compliance and may not use a correction method that the EPCRS specifically prohibits. However, sponsors can ignore certain current EPCRS requirements for self-correction that are inapplicable under the statute. For instance, sponsors don’t need to have a favorable determination letter and can ignore the general prohibitions on self-correcting certain failures (such as demographic and employer eligibility failures). Plan sponsors can also disregard the current requirements that corrections of significant operational failures must be substantially completed before the plan or sponsor is under IRS examination and before the end of the specified correction period.

Until the EPCRS is updated, sponsors can’t self-correct certain errors, even if they otherwise fit the definition of eligible inadvertent failures. The notice lists nine categories of failures that can’t yet be self-corrected, including:

• A failure to adopt an initial written plan document
• A significant failure in a terminated plan
• A demographic failure — generally, a failure to satisfy the nondiscrimination requirements of IRC Sections 401(a)(4), 401(a)(26) or 410(b) that isn’t corrected by a retroactive amendment under Treas. Reg. Section 1.401(a)(4)-11(g)
• An operational failure corrected by a plan amendment that is less favorable to participants than the original plan terms

As noted above, SECURE 2.0 provides an indefinite correction period, but that period is nonetheless subject to limitations:

• Failures identified by IRS. The notice provides that a failure will be treated as having been identified by IRS as soon as the plan or plan sponsor comes under an Employee Plans examination (even if the error had not actually been identified as of that date). These errors can’t be self-corrected unless IRS determines that the sponsor had already demonstrated a commitment to self-correct before the plan audit began. IRS explains that this determination will be based on facts and circumstances, but the sponsor must generally be actively pursuing the correction. Completion of an annual compliance audit or adoption of a general statement to correct failures once they’re discovered will generally not suffice. However, a sponsor may continue to self-correct insignificant errors (as defined in Rev. Proc. 2020-31), even if it is under an IRS audit that reveals the failure.
  
  
• Errors not corrected within a reasonable period. Determining whether an error has been corrected within a reasonable period after the failure is identified will be based on facts and circumstances. For most errors, IRS considers a correction within 18 months after the failure is identified to be reasonable. However, for an employer eligibility failure — the adoption of a 401(k) plan by an employer that’s ineligible to do so — the employer must stop all contributions to the plan as soon as reasonably practical, but no later than six months after identifying the failure.

Certain plan failures trigger an excise tax or other tax on the plan sponsor or affected participant (for instance, a participant failing to timely take a RMD may face a 25% tax). Plan sponsors seeking waivers of these taxes in connection with a correction must do so through the EPCRS’s Voluntary Correction Program (VCP), even if the failure is eligible for self-correction. The notice clarifies that self-correcting an error under the expanded EPCRS will not automatically result in a waiver of these taxes.

The new guidance applies only to the SCP expansion. The notice doesn’t address other SECURE 2.0 provisions dealing with error corrections, such as the new rules on recovering overpayments and correcting automatic contribution errors. The notice also doesn’t address DOL’s responsibilities to amend and restate the VFCP to allow self-corrections of plan loan failures.

Sponsors may immediately rely on the new notice until IRS updates the EPCRS. Some sponsors may have already self-corrected errors under SECURE 2.0’s expansion of the SCP before IRS issued the notice. If these corrections were done in a manner consistent with the notice, IRS will treat the sponsor as having applied a good-faith, reasonable interpretation of SECURE 2.0’s provisions. (The notice doesn’t address how IRS will treat a sponsor that made a good-faith, reasonable interpretation of SECURE 2.0 that doesn’t accord with the notice.)

IRS requests comments on the notice and any other aspects of SECURE 2.0’s expansion of the EPCRS. The agency specifically asks for comments on:

• Additional methods for correcting eligible inadvertent failures, including general correction principles that would apply in the absence of a specific correction method
  
  
• A description of common IRA failures and suggested correction methods, and the possibility of expanding the EPCRS to include IRA owners as well as custodians

• Notice 2023-43 (IRS, May 25, 2023)
• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)
• Rev. Proc. 2021-30 (IRS, July 16, 2021)

• User’s guide to SECURE 2.0 (March 7, 2023)