The IRS has issued the first guidance implementing the SECURE 2.0 Act. Notice 2023-43 addresses section 305 of SECURE 2.0, which significantly expands a retirement plan sponsor’s ability to self-correct certain types of errors under the Employee Plans Compliance Resolution System (EPCRS). Plan sponsors have been unsure as to whether they could use the expanded self-correction options immediately or if they were required to wait until the IRS updates the EPCRS to reflect the changes. In Notice 2023-43, the IRS confirms section 305 can be used immediately (with certain exceptions) and provides interim guidance, which is in effect until EPCRS is updated.
Specifically, the notice clarifies many of the new requirements for self-correction and identifies which EPCRS rules still apply and which do not. The notice confirms that failures that occurred before SECURE 2.0 was enacted on December 29, 2022, may be corrected in accordance with the new rules and provides relief for good-faith reasonable corrections that occurred after December 29, 2022, and before the notice was issued.
Note, the guidance does not address the other EPCRS-related changes made by SECURE 2.0 that relate to the recovery of plan overpayments or to correcting automatic contribution errors in defined contribution plans.
Background on EPCRS
EPCRS is the IRS program that allows plan sponsors to fix plan document and administration mistakes in their qualified retirement plans — including 401(k) and pension plans — and 403(b) plans. It includes both a self-correction program and a voluntary compliance program (VCP), which unlike self-correction requires an IRS filing.
Under the current version of EPCRS, which is set forth in Rev. Proc. 2021-30, self-correction is generally permitted if a failure is either 1) insignificant or 2) significant but the correction is completed by the last day of the third plan year following the plan year in which the failure occurred. Whether a failure is considered insignificant or significant is based on an eight-factor test outlined in the Rev. Proc. During an IRS examination, an insignificant failure may still be self-corrected, even if it is first identified during the examination; however, a significant failure may not be self-corrected unless it is “substantially completed” by the first date of the examination.
A sponsor is only eligible for self-correction if:
- The sponsor has established practices and procedures intended to support overall compliance with IRS requirements.
- The plan is the subject of a favorable determination letter — which for a 403(b) plan includes a plan that complies with Internal Revenue Code section 403(b) that was adopted by an eligible employer on or before December 31, 2009.
- The failure is eligible for self-correction.
- The correction approach satisfies certain rules and principles described under EPCRS.
SECURE 2.0 expansion of self-correction
Section 305 significantly expands the ability to self-correct eligible inadvertent failures through EPCRS unless the IRS discovers the violation before the plan takes steps that show a commitment to self-correct that specific failure or the self-correction is not completed within a reasonable period of time.
For an error to be considered inadvertent, the plan sponsor satisfies certain standards that generally require that the sponsor have established practices and procedures (formal or informal) in place that are routinely followed and are reasonably designed to comply with IRS requirements. An error is also not considered inadvertent if it is egregious, diverts or misuses plan assets, or directly or indirectly is related to an “abusive tax avoidance transaction.”
Section 305 guidance
Below are the requirements to self-correct under section 305 (with the terms clarified in the notice marked in italics), followed by a summary of the guidance provided in the notice:
- Section 305 requirement: The failure was not identified by the Secretary before any actions occurred that demonstrate a specific commitment to implement a self-correction with respect to the eligible inadvertent failure.
Guidance:
- A failure is treated as having been identified by the Secretary when it is “under examination” as defined under EPCRS; however, a failure deemed insignificant may be self-corrected even if the sponsor is under examination or the failure is identified during an examination.
- Facts and circumstances determine whether a sponsor has demonstrated “a specific commitment to implement a self-correction” of an eligible inadvertent failure; however, the sponsor’s actions must demonstrate it is actively pursuing self-correction. Completing a compliance audit or adopting a general statement that the sponsor intends to correct any failures when discovered will not be enough to demonstrate a specific commitment.
- For a significant failure, plan sponsors may want to consider documenting the intended correction when beginning the process. This may be helpful to demonstrate a commitment to correct in the event of an IRS examination prior to completing the correction.
- Section 305 requirement: The self-correction is completed within a reasonable period after the failure was identified.
Guidance:
- A reasonable period is generally determined based on the facts and circumstances.
- A reasonable period for all failures other than an employer eligibility failure — for example, a for-profit entity that participates in a 403(b) plan — would be by the end of the 18th month after the sponsor identifies the failure.
- For an employer eligibility failure, the sponsor must cease all contributions to the plan as soon as practicable but no later than the last day of the sixth month after the failure is identified.
- Section 305 requirement: The failure is not egregious, as described in section 4.10 of Rev. Proc. 2021-30, does not directly or indirectly relate to an abusive tax avoidance transaction, as described in section 4.12(2) of Rev. Proc. 2021-30, and does not relate to the diversion or misuse of plan assets.
Guidance:
- The notice does not provide any interim guidance regarding when a failure is ineligible for self-correction because it is considered egregious, an abusive tax avoidance transaction, or related to a diversion or misuse of plan assets.
- The notice does identify certain failures that are ineligible for self-correction pending the update to EPCRS (discussed further below).
- Section 305 requirement: The self-correction satisfies all of the provisions applicable to self-correction set forth in EPCRS (with certain specific exceptions).
Guidance:
- The following EPCRS self-correction rules and principles still apply:
- The sponsor must have established practices and procedures that are reasonably designed to promote compliance.
- A sponsor must apply the correction principles and rules of general applicability set forth in section 6 of Rev. Proc. 2021-30.
- A sponsor may, but is not required to, use a correction method set forth in Appendix A or B of Rev. Proc. 2021-30, and these correction methods are deemed to be reasonable and appropriate methods of correcting a failure.
- The notice provides that a sponsor may not use a correction method that is prohibited under Rev. Proc. 2021-30.
- Self-correction of a failure that involves an excise or additional tax does not automatically resolve the related tax issue; however, a waiver of the tax may still be requested through a VCP filing or as part of a closing agreement under the Voluntary Closing Agreement Procedure.
- The notice clarifies that VCP remains available for errors eligible for self-correction.
- The notice identifies nine inadvertent failures that are not eligible for self-correction before EPCRS is updated, which include the following:
- Failure to adopt a written plan document
- A significant failure (i.e., a failure that is not insignificant as defined in Rev. Proc. 2021-30) in a terminated plan
- An amounts or coverage testing failure unless corrected as permitted under Rev. Proc. 2021-30
- Use of a plan amendment to correct an operational failure if the amendment is less favorable to the participant or beneficiary than the original plan terms (e.g., a correction of a purported “scriveners error”)
- The notice confirms that existing recordkeeping requirements for self-correction continue to apply. Upon request during an examination, the plan sponsor should be able to provide documentation to substantiate the self-correction. Examples in the notice include documentation that identifies:
- The failure, including the years of occurrence, the number of employees affected and the date the failure was identified
- How the failure occurred and demonstrates the existence of practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance that were in effect when the failure occurred
- The correction method and substantiates that the correction was completed (including the date it is completed)
- Any changes to established practices and procedures to ensure that the failure does not reoccur
- The following aspects of the current EPCRS program no longer apply for self-correcting an eligible inadvertent failure:
- Qualified and 403(b) plans are no longer required to have a favorable determination letter.
- Certain nondiscrimination and employer eligibility failures are no longer prohibited from being self-corrected.
- Prohibitions against self-correcting certain loan failures no longer apply.
- The following EPCRS rules regarding the time limit to self-correct a significant failure no longer apply:
- The requirement to at least substantially correct the failure before the plan or plan sponsor is under examination
- The requirement to correct a significant failure by the end of the third year after the failure occurred
Going forward
Sponsors should review the guidance when considering whether and how to self-correct a failure. Any corrections that are completed on or after December 29, 2022, and before the notice was issued should be reviewed to ensure they align with the EPCRS rules that remain in effect. The notice provides that corrections during this period may rely on a good-faith reasonable interpretation of section 305, and a correction that corresponds with the notice will be treated as satisfying this standard.
