IRS Announces Important Changes to Correction Programs

An IRS Revenue Procedure expands self-correction methods for certain retirement plan document and retirement plan loan failures and provides a new method of correction by plan amendment.

The Internal Revenue Service has issued Revenue Procedure 2019-19 to expand Self Correction Program (SCP) eligibility to permit correction of certain plan document failures and certain plan loan failures, and also to provide an additional method of correcting operational failures by plan amendment under SCP.

The agency says the revenue procedure updates the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of Sections 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue Code, but that have not met these requirements for a period of time. The Department of the Treasury and the IRS have concluded that an expansion of SCP will facilitate compliance for plans, while reducing costs and burdens of compliance by allowing plan sponsors to self-correct in certain additional circumstances.  The new procedures were effective April 19.

Correcting certain plan document failures

Numerous conforming changes to the revenue procedure have been made to implement the expansion of SCP to permit correction of certain plan document failures. Section 4.01 is revised to provide that SCP is available to correct certain plan document failures.  Section 4.01(1)(b) provides that, if otherwise eligible to correct under SCP, a sponsor of a qualified plan or 403(b) plan may correct certain plan document failures under SCP, other than the initial failure to adopt a qualified plan or the failure to adopt a written 403(b) plan document timely.  Plan document failures under SCP are always treated as significant failures and may be corrected under SCP only if the plan, as of the date of correction, is subject to a favorable letter and the correction is made within the SCP correction period.

The new revenue procedure also permits certain plan document failures to be corrected by plan amendment if the plan has a favorable letter and meets other requirements stated in the revenue procedure.

Correcting operational failures by plan amendment

The revenue procedure adds new rules for correcting operational failures by plan amendment under SCP.  Under the new correction rules, an operational failure may be corrected by plan amendment under SCP if three conditions are satisfied: (a) the plan amendment would result in an increase of a benefit, right, or feature; (b) the increase in the benefit, right, or feature is available to all eligible employees; and (c) providing the increase in the benefit, right or feature is permitted under the Code and satisfies the correction principles of section 6.02. 

Correction of certain plan loan failures

The revenue procedure also provides that errors relating to the failure to repay a plan loan according to plan terms (a defaulted loan) may be corrected under SCP in accordance with section 6.07(3)(d). The correction methods for a defaulted loan are the same as those provided under Rev. Proc. 2018-52; namely, permitting correction by either a single-sum repayment, re-amortization of the outstanding loan balance, or a combination of the two.

Section 6.07(5) provides that a plan sponsor may correct a failure resulting from granting a number of plan loans that exceeds the number of loans permitted under a plan by adopting a plan amendment in accordance with the correction by plan amendment methods set forth in section 2.07(3) of Appendix B of the revenue procedure.

Section 6.07(1) of Rev. Proc. 2018-52 provided that if correction of a plan loan failure is not made, a deemed distribution under Section 72(p)(1) must be reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with respect to the affected participant. Rev. Proc. 2018-52 permitted, as part of Voluntary Correction Program (VCP) and Audit closing agreement program (CAP), a plan sponsor to report the deemed distribution on Form 1099-R in the year of correction (instead of the year of the failure), but only if the plan sponsor specifically requested that relief. Section 6.07(2) of the new revenue procedure eliminates the requirement that the reporting relief must be requested in order to report the deemed distribution in the year of correction.

Revenue Procedure 2019-19 also addresses correction methods related to plan loans made in excess of statutory limits and plan loans issued without spousal consent.