In 2018, the IRS modified its program for correction of plan qualification failures to significantly increase the fees for getting approval of corrections under the Voluntary Compliance Program (“VCP”). Since that occurred, the IRS has issued expanded permissible self-correction methods under Revenue Procedure 2019-19.
This new Procedure provides many new ways in which a plan sponsor may act independently to fix errors to retain the plan’s tax qualification, without IRS filings, user fees, or other involvement.
The new procedure permits plans to self-correct failures in two categories that previously required VCP filings: problems with participant loans and plan amendments.
1. In regards to loan failures, the new procedure permits self-correction of loan failures if the failure relates to
• A default on loan payments (if the five-year maximum repayment period has not expired);
• Allowing participants to have multiple loans even though not permitted under the plan or loan procedure;
• Providing a loan when the plan does not permit (which was allowed under the old procedure, and continues under the new); or
• The failure to obtain spousal consent (assuming that the spouse is now willing to provide that consent—if not, VCP is required to repair this failure).
A loan failure correction of the above can either result in participant avoiding being taxed on the date of failure or avoiding the plan from being disqualified or both. If a plan sponsor allows participants to take loans in amounts that exceed the legal limits (generally, $50,000 or 50% of the participant’s vested interest), that have repayment periods in excess of the five-year limit (or the extended period allowed for home loans), or that do not provide for level, fully amortized payments, such failures must still be corrected through VCP. Self-correction is not an option.
While this correction method works for purposes of the IRS, it may not be a sufficient correction for purposes of the Department of Labor (“DOL”). Therefore, to be certain the loan problem is not a prohibited transaction it may be necessary to file under the DOL’s Voluntary Fiduciary Correction Program.
2. In regards to plan amendment failures, generally, such failures had to go through VCP for correction (there were 3 limited exceptions that allowed an amendment to basically increase benefits to participants overall). The new procedure allows self-correction in many more situations provided that:
• The amendment conforms the plan document to actual operations;
• A benefit, right, or feature of the plan would increase as a result of the amendment;
• The increase applies to all eligible employees; and
• Providing the increase is consistent with the procedure’s correction principles.
Amendments may also be used to self-correct plan documentation failures (i.e., failures relating to the inclusion of a provision that is prohibited or the omission of a provision required for plan qualification):
• If the failure is a so-called “nonamender failure,” i.e., a failure to timely amend the plan. This includes a failure to timely adopt an interim amendment required by the IRS and possibly, if the failure relates to not timely adopting a restatement of a preapproved plan. This option may be limited, because such a plan may no longer meet the requirement (needed for any self-correction) that it has a “favorable determination letter,” which is defined for preapproved plans to be a favorable opinion or advisory letter on a preapproved document with respect to the most recently expired six-year remedial amendment period.
• If the failure is that the sponsor of an individually designed plan (“IDP”) did not timely adopt an amendment needed to comply with an item that appeared on the Required Amendments List. Generally, the sponsor of an IDP must adopt such an amendment by the end of the second calendar year after the item first appears on the Required Amendments List.
An important note is that all self-corrections by amendment must be done before the end of the second year following the year in which the error occurred.