The Internal Revenue Service (IRS) has revised its correction procedures to simplify correction of overpayments in defined benefit plans, make it cheaper to correct plan loan and minimum distribution errors, and provide more time to correct excess annual contributions. Through Revenue Procedure 2015-27, the IRS has modified its program called the Employee Plans Compliance Resolutions System or EPCRS.
The key substantive and fee-related changes are summarized below:
- Overpayments in Defined Benefit Plans. When there is an overpayment from a defined benefit plan, EPCRS generally requires the employer to take reasonable steps to have the overpayment returned to the plan. However, employers are often reluctant to try to recover the overpayment, particularly when the overpayments were made over a long period of time. Revenue Procedure 2015-27 permits two additional methods of correction. Depending on the nature of the overpayment failure (for example, an overpayment resulting from a calculation error), an appropriate correction method may include having the employer or another person contribute the amount of the overpayment (with appropriate interest) to the plan in lieu of seeking recoupment from the participant or beneficiary. Also, Revenue Procedure 2015-27 provides for the adoption of a retroactive amendment to conform the plan document to the plan's operations (presumably permitting the overpayment), although this would require IRS approval.
- Fees for Correction (Loans and RMDs). EPCRS has different fees for different types of correction and generally increased based on the number of participants in the plan. For plan loans, correction fees were based on the number of total participants. Now, correction fees will now be based upon the number of participants with loans to be corrected. For plan loans generally, the fee had been 50% of the regular filing fee based on the number of participants (resulting in a fee from $375 to $12,500). Under the changes, the fee ranges from $300 to $3,000 depending on the number of participants with loan failures. For required minimum distribution (RMD) failures (that constitute the only error), EPCRS provided that $500 would cover a failure involving up to 50 participants. As amended, the fee will now cover up to 150 participants. However, the fee will be $1,500 if the number of affected participants is 151 to 300. No reduced fee applies if the number is greater than 300.
- Code Section 415 Failures. Internal Revenue Code Section 415 limits the total annual additions to plans. For defined contributions plans, the total annual addition for 2015 is $53,000 (excluding catch-up contributions). EPCRS provides that, in a plan that provides for both elective deferrals and non-elective contributions (other than matching contributions), the plan will not fail to have sufficient practices and procedures to self-correct the error if it corrects the error by returning the excess contributions within nine and a half months (previously two and a half months) after the end of the plan year.
The IRS issued another Revenue Procedure that provides for other changes to EPCRS. These will be addressed in a second article.
If you have any questions regarding these changes, please contact one of the attorneys in the Employee Benefits & Executive Compensation Group at Bradley Arant Boult Cummings LLP.