Self-Correction Opportunities: Understanding EPCRS Updates

Even the most carefully managed retirement plans are susceptible to mistakes during navigation of complex ERISA laws and regulations. The good news is that plan sponsors may avoid plan disqualification by correcting eligible failures through the Employee Plans Compliance Resolutions System (EPCRS). Understanding how EPCRS functions and the types of errors it addresses can help maintain plan qualification and manage compliance. In this article, we explore EPCRS fundamentals and share practical guidance for using the system effectively.

EPCRS Fundamentals and Practical Benefits

The Employee Retirement Income Security Act of 1974 (ERISA) sets standards for many tax-qualified retirement plans offered in the private sector. The Internal Revenue Service (IRS) and Department of Labor (DOL) enforce ERISA provisions and plan compliance with reporting requirements. Each agency offers self-correction programs, with the IRS administering EPCRS.

The SECURE 2.0 Act of 2022 (SECURE 2.0) expanded EPCRS, allowing self-correction of certain eligible inadvertent failures and extending the timeline for correction from three years to a reasonable period after the mistake is discovered. Plans seeking to remediate errors through EPCRS may choose from three options, each tailored to different circumstances or situations:  

• Self-Correction Program (SCP): Plans can correct eligible plan errors through the SCP without IRS involvement or fees and are not required to file an application. 
• Voluntary Correction Program (VCP): To use the VCP, the plan provides a written application to the IRS and pays a fee. Eligible errors can then be corrected with IRS approval.
• Audit Closing Agreement Program (Audit CAP): Mistakes found during an audit or IRS investigation can be corrected through Audit CAP. Fees generally are higher than VCP but typically are more favorable than the potential consequences of failing to correct the error. 

Whether EPCRS may be used to self-correct plan qualification failures depends on the type of error discovered and the surrounding circumstances. 

Errors Eligible for Self-Correction

EPCRS applies to all “eligible inadvertent failures.” For fiduciaries responsible for plan operations and maintenance, the question becomes: “What constitutes an eligible inadvertent failure?” Such an error “is an operational, document or demographic failure that violates the IRS qualification requirements” that occurs despite the plan’s thorough and rigorous oversight. This term does not include actions that constitute flagrant errors, diversion or misuse of plan assets, or participation in abusive tax avoidance transactions.

Currently, some of the eligible inadvertent failures listed in SECURE 2.0 cannot be self-corrected through EPCRS. These include:

• Failure to initially adopt a written plan
• Correction of an operational failure by plan amendment that conforms the plan document to the plan’s prior operations in a manner that is less favorable for a participant or beneficiary than the original plan terms
• Significant failures in a terminated plan
• Certain demographic failures
• Failures in orphan (abandoned) plans
• Employee stock ownership plan (ESOP) failures involving IRC Section 409
• Excess contributions to a SEP or SIMPLE IRA that allows the excess to remain in the plan
• Failures in SEPs or SIMPLE IRAs that do not use the IRS model plan documents and even for model plans when excess contributions remain in the IRA account

Identifying errors and choosing the best path to remediation is challenging, especially as laws evolve. Implementing proactive policies that promote constant oversight of plan documents and operations can be an effective way to support this important responsibility.

Best Practices to Follow When Using EPCRS

Reaping the benefits of self-correction requires both proactive and reactive measures. The following best practices can help plan sponsors identify and correct errors, as well as serving as preventive measures:

• Assess Initial Plan Qualification: Confirm that the plan meets all IRS qualification requirements for a tax-qualified retirement plan. 
• Set Up Error Identification Processes: Develop and implement procedures that promote ongoing review of plan documents and operations. Train fiduciaries and third-party providers on plan requirements to help mitigate the risk of future errors. 
• Avert Disclosure Pitfalls: Avoid mentioning potential self-correction in your financial statements and disclosures unless corrective action is already being taken. 
• Choose the Right Self-Correction Program: Once an error has been discovered, evaluate it thoroughly to determine whether it qualifies for self-correction. Remember that only errors related to plan qualification can be corrected through the EPCRS. 
• Watch the Timing: Correct eligible inadvertent errors within a reasonable time, which is generally 18 months after the plan identifies the failure. 
• Line Up Documentation: When self-correcting through the EPCRS, maintain thorough documentation that confirms attempted correction and compliance.

Finding an error that could disqualify an ERISA plan is alarming but can be managed when plan fiduciaries take prompt and thorough action.