The IRS has issued Revenue Procedures 2015-27 and 2015-28 (“Rev. Proc. 2015-27” and “Rev. Proc. 2015-28”), which modify the IRS’ retirement plan correction programs known as the Employee Plans Compliance Resolution System (“EPCRS”) issued in Revenue Procedure 2013-12 (“Rev. Proc. 2013-12”). These correction method updates are welcome news to sponsors of 401(k) and 403(b) plans. Highlights of these updates are summarized below:

Rev. Proc. 2015-27 (generally effective July 1, 2015, but may be applied earlier)

• Correction of Overpayment Failures. Prior to Rev. Proc. 2015-27, the common belief was that EPCRS required plan sponsors to seek recoupment of most overpayments from participants and beneficiaries. Recognizing the distress and financial hardship this approach had on affected participants and beneficiaries, particularly when the overpayments occur over a lengthy period of time, the IRS has now clarified that plans do not have to seek recoupment from affected plan participants or beneficiaries in every situation. Depending on the nature of the overpayment failure (for example when the overpayment is the result of a calculation error or because the participant is deceased), the plan sponsor may be permitted to make a plan contribution with interest in lieu of first seeking repayment from participants or beneficiaries. It is important to note that Rev. Proc. 2015-27 does not provide any relief from the requirement to notify participants and beneficiaries that overpayment amounts are not eligible for rollover. The IRS intends to make further revisions regarding overpayment corrections and has asked for written comments by July 20, 2015, on what other changes and additional guidance is needed.
• Certain Reduced VCP Compliance Fees. Prior to Rev. Proc. 2015-27, the compliance fee under EPCRS’ Voluntary Correction Program (“VCP”) when a plan’s sole failure was late payment of required minimum distributions (“RMDs”) for no more than 50 participants, was $500. Rev. Proc. 2015-27 expanded the availability of a reduced compliance fee for an RMD failure. Now, if a plan’s sole failure is late payment of RMDs that affects no more than 300 plan participants, the VCP compliance fee will be $500 if no more than 150 participants were affected, or $1,500 if 151 to 300 participants were affected.
  
  Rev. Proc. 2015-27 also significantly lowered the VCP compliance fee when the only failure is related to plan loans. Previously, the compliance fee for plan sponsors with loan failures that affected no more than 25 percent of the participants in any year the error occurred ranged from $375 to $12,500, based on the total number of participants in the plan (i.e., 50 percent of the standard VCP compliance fee). Now, the VCP compliance fee for this error ranges from $300 to $3,000, based on the number of affected participants. This change is most beneficial to larger plans, especially if they have a relatively small number of loan errors.
• Self-correction of Excess Annual Additions. When contributions to a defined contribution plan exceed the limitations under section 415 of the Internal Revenue Code for a limitation year (“excess annual additions”), it is an operational failure. In certain limited circumstances, plan sponsors may use EPCRS’ Self-Correction Program (“SCP”), which does not involve a filing with the IRS or the payment of a compliance fee, to correct such an error if the plan had established procedures to avoid such errors and routinely followed them, but the error still occurred (e.g., through an oversight or a mistake in following the procedures). Prior to Rev. Proc. 2015-27, in order to utilize SCP, the excess annual additions had to be distributed to the affected participants within 2-1/2 months of the end of the limitation year in which the error occurred. Now, a plan that provides for elective deferrals and employer nonelective contributions is deemed to have established procedures (and thus can correct the error using SCP) if the plan regularly distributes excess annual additions within 9-1/2 months after the end of the limitation year in which the error occurred.
• Concurrent Determination Letter Applications. Prior to Rev. Proc. 2015-27, a plan sponsor generally had 150 days from the date a VCP compliance statement was issued to adopt corrective plan amendments. Now, if a determination letter application was required to be filed with the VCP submission, the plan sponsor generally has until the later of (i) 150 days from the date of the compliance statement or (ii) 91 days after a favorable determination letter is issued, to adopt the corrective plan amendments. The IRS has also eliminated the requirement to file a concurrent determination letter application in certain situations (e.g., if more than 12 months have passed since distribution of substantially all plan assets as part of a plan’s termination).
• VCP Model Forms. The IRS has replaced the model VCP submission documents (e.g., compliance statement, schedules, and acknowledgment letter) found in Appendices C and D of Rev. Proc. 2013-12 with new forms, which are located on the IRS’ website.

Rev. Proc. 2015-28 (effective April 2, 2015)

• Guidance for Automatic Enrollment Plans. Rev. Proc. 2015-28 modified EPCRS to provide new safe harbor correction methods for failures related to automatic contribution features. Now, the plan sponsor does not have to make a corrective contribution to an affected participant’s account for a missed elective deferral, as long as:
  • The correct elective deferrals begin before the end of the 9-1/2-month period beginning after the plan year in which the failure first occurred (or, if the affected employee notifies the employer of the mistake, by the first payment of compensation made to the affected employee after the end of the month following the month in which the notification is made, if earlier);
  • The affected employee is given notice of the failure no later than 45 days after the correct elective deferrals begin; and
  • Any additional matching contributions required to be made by the plan sponsor because of the elective deferral error are substantially made by the last day of the second plan year following the plan year in which the failure first occurred.

Employee Elective Deferral Failures. Prior to Rev. Proc. 2015-28, the correction method for missed elective deferrals generally was for the plan sponsor to make a corrective contribution equal to 50 percent of the missed deferrals. There was a small exception from this contribution requirement if the affected employee had the opportunity to make elective deferrals under the plan for at least the last nine months of the plan year in which the failure occurred. The IRS has recognized that these old rules provided a windfall to employees, who received the missed elective deferrals in their paychecks and then also received a corrective contribution of 50 percent of the amount of the missed elective deferrals. Under the new rules, no corrective contributions are required if the period of failure does not exceed three months, even if fewer than nine months remain in the plan year that the failure occurred, provided:

• The correct elective deferrals begin no later than the first payment of compensation made on or after the three-month period starting on the date the failure first occurred (or, if the affected employee notifies the employer of the mistake, by the first payment of compensation made to the affected employee after the end of the month after the month in which the notification is made, if earlier);
• The affected employee is given notice of the failure no later than 45 days after the correct elective deferrals begin; and

Also, an elective deferral failure that exceeds three months may now be corrected by a corrective contribution of 25 percent of the missed deferrals (instead of 50 percent) if:

• The correct elective deferrals begin before the end of the second plan year following the plan year in which the failure first occurred (or, if the affected employee notifies the employer of the mistake, by the first payment of compensation made to the affected employee after the end of the month after the month in which the notification is made, if earlier);
• The affected employee is given notice of the failure no later than 45 days after the correct elective deferrals begin; and
• Any corrective contributions (including corrective matching contributions) required because of the elective deferral error are substantially made by the plan sponsor by the last day of the second plan year following the plan year in which the failure occurred.
• Earnings. Rev. Proc. 2015-28 provides that if an employee affected by a failure described in Rev. Proc. 2015-28 has not affirmatively designated an investment alternative, the plan’s default investment alternative may be used to calculate the missed earnings, provided that any cumulative losses will not reduce the corrective contributions relating to any missed matching contributions.

If you have any questions regarding these welcome revisions to EPCRS, or any other employee benefits-related questions, please contact one of the authors.

Client Alert 2015-156