Each year, our Technical Services Committee creates a Regulatory Update covering the legislative, regulatory, and litigation developments affecting retirement plans. This year, we continue the conversation about the SECURE Act and the new provisions released this year, as well EPCRS changes, DOL updates, and the notable retirement plan fee litigation cases from this year.
This year brought several updates from the Internal Revenue Service. Here is what we cover about the IRS regulatory changes and updates.
IRS Extends Temporary Relief from 'Physical Presence' Requirement
On June 24, 2021, the Internal Revenue Service (IRS) issued Notice 2021-40, which provides a 12-month extension, until June 30, 2022, of the temporary relief from the requirement that participant elections are required to be witnessed by a plan representative or a notary public. The IRS initially issued this temporary relief in the early days of the coronavirus pandemic lockdown. The Notice provides that, in the case of a remote electronic notarization, the physical presence requirement can be satisfied if it is executed via live audio-video technology that otherwise satisfies the requirements of participant election.
IRS Announces Changes to Correction Programs
On July 16, 2021, IRS announced changes to the Employee Plans Compliance Resolution System (EPCRS). The updates, found in Revenue Procedure 2021-30, supersede the previous version outlined in Revenue Procedure 2019-19 and includes changes applicable to both defined benefit and defined contribution plans. Highlights include:
- Extending the Self-correction Program (SCP) correction period for significant failures from two to three years. As a result, the last day of the correction period is now the last day of the third plan year, following the plan year during which the failure occurred.
- Eliminating the requirement that an amendment to fix an operational failure under SCP that increases a benefit right or feature must apply to all participants. Previously, EPCRS required a corrective amendment to result in an increase of a benefit, right, or feature applicable to all employees eligible to participate in the plan. The updated version provides that a corrective amendment must still result in an increase of a benefit, right or feature. Still, it no longer requires that the increase is applicable to all eligible employees.
- Effective Jan. 1, 2022, the anonymous submission procedure under the Voluntary Correction Program (VCP) is eliminated. On that date, a new anonymous no-fee VCP pre-submission conference procedure will take effect. During this conference, an IRS representative will provide oral feedback on the proposed correction methods. However, any discussion of substantive issues will be advisory only and will not be binding on the IRS.
Corrections of Overpayments (Defined Benefit and Defined Contribution)
The revised EPCRS provides two new correction methods defined benefit plans may use to address overpayments. The "Funding Exception Method" is available to both single-employer and multi-employer plans, while the "Contribution Credit Correction Method" is only available to single employer plans.
Expanded correction principles allow plan sponsors to fix operational failures when plan participants or beneficiaries receive payments that are in excess of the plan's written terms, effective July 16, 2021. The new principles reduce the need to seek repayment from participants or beneficiaries who received overpayments and, in some cases, do not require the plan sponsor to reimburse the plan for overpayments to participants.
For Defined Benefit Plans:
- The Funding Exception Method
For plans subject to Code Section 436 funding requirements, no corrective payment is necessary if the Adjusted Funding Target Attainment Percentage (AFTAP) applicable on the date of correction is at least 100%. While future benefit payments to the affected participant must be reduced to the correct amount, no further corrective payments from any party are required, and no further reductions to future benefit payments are permitted.
- The Contribution Credit Correction Method Under this method, the amount of overpayments required to be repaid to the plan is the amount of overpayments reduced by a contribution credit equal to (i) increase in minimum funding requirements due to the overpayments plus (ii) certain additional contributions to the plan in excess of the minimum funding requirements:
- For purposes of EPCRS, if the amount of the overpayments is reduced to zero after the contribution is made, then no additional corrective action needs to be taken to recover the overpayment. If a net amount is owed to the plan, then the plan sponsor or participant must reimburse the plan for the net amount owed.
- If the plan sponsor chooses to seek recovery from the overpayment recipient, it must provide written notice, and three repayment options must be offered:
- Installment agreement
- Adjusting future benefit payments
- Single sum payment
For Defined Contribution Plans:
- Increases the de minimis threshold for what is considered insignificant overpayments. Under the new guidance, a plan sponsor is not required to seek the return of an overpayment if the overpayment totaled $250 or less and guidance now permits plan sponsors to seek recoupment of an overpayment by entering into an installment agreement with the recipient of the overpayment. This threshold was previously set at $100.
Finally, the updated version of EPCRS extends the sunset date of the safe harbor correction method for certain employee elective deferral failures relating to employees who are subject to an automatic contribution feature in a 401(k) plan or a 403(b) plan. The previous version of EPCRS provided that the safe harbor for the correction method would sunset on Dec. 31, 2020. Effective Jan. 1, 2021, the new sunset date is Dec. 31, 2023.
Under this safe harbor, elective deferral failures can be corrected with reduced qualified non-elective contributions (QNECs) by certain deadlines. Elective deferral failures that do not exceed three months can be corrected without any QNEC under some circumstances. Failures that exceed three months but do not exceed the SCP correction period for significant failures may be corrected with a 25% QNEC
IRS Priority Guidance for 2021-2022
On Sept. 9, 2021, the IRS issued their Priority Guidance Plan on a variety of topics, including retirement benefits. There were 19 priorities for retirement benefits covering both DB and DC plans. A few key areas being prioritized include:
- Guidance on e-delivery rules for notices and participant elections
- Regulations and guidance on several modifications included in the SECURE Act
- Guidance on student loan payments
- Guidance on addressing missing participants and uncashed checks
- Regulation and guidance related to the 10% early withdrawal penalty
To read our full 2021 Regulatory Update, click the button below.
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