IRS issues guidance on SECURE 2.0 EPCRS self-correction program expansion

Overview of SECURE 2.0 Section 305 EPCRS self-correction 

SECURE 2.0 Section 305 expands the use of self-correction for eligible inadvertent failures (EIFs) in qualified plans, 403(a) tax-sheltered annuities, 403(b) plans, SEP IRAs, and SIMPLE IRAs. This summary focuses on the key parts of the guidance that affect 401(k) plans.

An EIF is defined as a failure that:

1 Isn’t egregious, doesn’t relate to misuse or diversion of plan assets, or isn’t directly or indirectly related to an abusive tax avoidance transaction

2 Occurs despite the plan having practices and procedures in place to maintain the tax-qualified status of the plan 

The IRS is required to update Revenue Procedure (Rev. Proc.) 2021-30—the governing document for the EPCRS—by December 29, 2024, to reflect Section 305.

Summary of IRS guidance in Notice 2023-43

In the interim, the IRS has issued Notice 2023-43, which applies many of the principles of Rev. Proc. 2021-30 to EIFs, with some significant expansions.    

General guidelines for IRS self-correction

Under this notice, plan sponsors can correct EIFs immediately—even those that occurred before SECURE 2.0 was enacted into law (December 29, 2022). They don’t have to wait for the revenue procedure to be updated or have an IRS determination letter for their plan. Additionally, sponsors can use either the EPCRS self-correction program or the voluntary correction program (VCP) to fix the failure. If self-correction is chosen, the error must generally be corrected within 18 months after it’s identified (with an earlier deadline for employer eligibility failures).

In situations where a plan is audited by the IRS, the plan sponsor can still use (or continue to use) self-correction to fix an EIF if it’s insignificant, or if it’s significant and correction is being “actively pursued” (which requires at least some action having been taken (specific commitment) to implement correction of the specific EIF after it’s discovered).

EIFs that can be self-corrected despite not being currently permitted under Rev. Proc. 2021-30

• Demographic failures
• Employer eligibility failures
• Loans that violate code Section 72(p) because they exceed the maximum loan amount, exceed the maximum loan term, or violate the substantially equal installment repayment requirement
• Significant failures, regardless of how long ago they occurred

EIFs that can’t be self-corrected until Rev. Proc. 2021-30 is updated

• Seeking excise tax waiver relief 
• Failure to initially adopt a written plan
• Significant failures in a terminated plan (insignificant failures can be self-corrected)
• Failures in orphan plans
• Demographic failures, which aren’t corrected with a retroactive amendment under Treasury Regulation Section 1.401(a)(4)-11(g)
• Correction by retroactive amendment with less favorable terms

Documentation reminders

Notice 2023-43 also reminds plan fiduciaries that self-corrections should be documented in case of an IRS audit. The documentation should include:

• A description of the failure, when it was discovered, how many years it occurred, and the number of individuals affected
• The practices and procedures in place to prevent failure and explanation of how (despite those practices and procedures) the failure occurred
• The correction method used and the date the correction was completed
• Documentation substantiating the correction
• The changes to practices and procedures (if any) to prevent the failure from recurring

There are other EIFs, which are beyond the scope of this article. As always, plan sponsors should work closely with their ERISA attorney, financial professional, and third-party administrator in determining whether an eligible inadvertent failure can be self-corrected under the EPCRS.

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