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SECURE Act 2.0: Congress Amends EPCRS

SECURE Act 2.0 mandates changes to the Employee Plans Compliance Resolution System (“EPCRS”), the IRS’s merciful alternative to disqualifying plans that fail to comply fully with the increasingly labyrinthine requirements of the Internal Revenue Code. One change, which will be discussed in a separate post, is the extension of EPCRS to individual retirement accounts. The other major change is liberalization of the circumstances in which qualification defects can be “self-corrected”, without any need to obtain IRS concurrence with the correction method. Whether the new law will have much practical effect will depend on how generously the IRS interprets it and whether employers are willing to accept the risks inherent in self-correction.


Background: A quarter century ago, the IRS acknowledged that it needed weapons other than disqualification (analogous to arming policemen with nothing but tactical nuclear weapons) to enforce the plan qualification rules. To that end, it created EPCRS, which allows employers to bring errant plans into compliance voluntarily with, at worst, nominal monetary penalties.


Over the years, EPCRS has been expanded and refined through successive Revenue Procedures, issued at roughly two-year intervals. The latest is Rev. Proc. 2021-30, which both expounds general correction principles (the most important being that participants should, to the extent feasible, be put into the same position as if no failure had occurred) and furnishes a cookbook of plan defects and IRS-approved correction methods.


Employers that want to be certain that their correction methods are acceptable to the IRS can file for approval under the Voluntary Correction Program (“VCP”). The IRS will review the correction and, if it agrees that it is adequate, issue a “compliance statement” confirming the plan’s qualified status. For this service, the employer must pay a “user fee” of $1,500 to $3,500, depending on the value of plan assets.


Instead of utilizing VCP, an employer may correct qualification failures on its own. Rev. Proc. 2021-30 imposes some restrictions:

  • Self-correction is allowed only if the employer has in place “practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance in form and operation with applicable Code requirements”.

  • Violations of the nondiscrimination standards, which prohibit excessive skewing of benefits in favor of highly compensated employees, can be corrected only through VCP or through a closing agreement following an IRS audit (“Audit CAP”). Self-correction is not available.

  • If a qualification failure is “significant”, any self-correction must be substantially completed by the end of the third plan year following the year in which the failure occurred. The correction period is cut short if the plan is selected for an IRS audit.

Self-correction carries an audit risk. If IRS auditors decide that the correction was insufficient, or if correction of a “significant” violation was carried out too late, the plan is exposed to Audit CAP. It can (and almost always will) escape disqualification, but the monetary penalties are usually much larger than under VCP.


What SECURE Act 2.0 Changed: SECURE Act 2.0 directs the IRS to eliminate the deadline for self-correction of “eligible inadvertent failures”, which are defined essentially as all qualification failures that are currently eligible for self-correction, whether “significant” or “insignificant”. The new rule is that the self-correction period never ends, unless (i) the IRS identifies the failure before the employer takes “any actions which demonstrate a specific commitment to implement a self-correction” or (ii) “the self-correction is not completed within a reasonable period after such failure is identified”. Self-correction is still not allowed if the failure “is egregious, relates to the diversion or misuse of plan assets, or is directly or indirectly related to an abusive tax avoidance transaction”.


Although the statutory commands won’t be reflected in the EPCRS guidance until Rev. Proc. 2021-30’s successor appears, they became effective on the date of enactment, December 29, 2022, and apply to failures that hadn’t been corrected as of that date.


The elimination of the correction deadline primarily affects plans that are selected for audit, an event that previously cut off the opportunity to rectify “significant” failures through either self-correction or VCP. Last year the IRS itself announced a pilot program under which it notifies plans in advance of audits and allows them to self-correct defects before the audit actually begins. (The announcement appeared in the IRS’s online publication Employee Plans News on June 3, 2022.) If the pilot program becomes the general rule, the SECURE Act 2.0 change will matter only when “significant” qualification failures are discovered later than three years after the fact. In those cases, unfortunately, it may be very difficult to be confident that the plan’s procedures “to promote and facilitate overall compliance in form and operation with applicable Code requirements” were adequate.


A few caveats should be noted:

  • SECURE Act 2.0 gives the IRS authority to re-impose a deadline for corrections through either regulations or future guidance of general applicability.

  • The Act also directs the IRS to “issue guidance on correction methods that are required to be used to correct eligible inadvertent failures, including general principles of correction if a specific correction method is not specified”. There is nothing to prevent the IRS from limiting self-correction methods to a subset of those available under VCP and Audit CAP.

  • If belated self-correction of “significant” failures becomes commonplace, the IRS may scrutinize more closely the adequacy of plans’ procedures “to promote and facilitate” adherence to the qualification requirements.

Like much else in SECURE Act 2.0, its EPCRS modifications are helpful but not revolutionary – and no reason to become complacent about negligence in plan documentation or operation.


References: Pub. Law 117-328, Div. T, §305; Revenue Procedure 2021-30, 2021-32 I.R.B. 1118


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