IRS Modifies Compliance Resolution System

The Internal Revenue Service (IRS) has announced modifications to Revenue Procedure 2013-12 to make miscellaneous changes designed to improve the agency’s Employee Plans Compliance Resolution System (EPCRS).

In Revenue Procedure 2015-27, the IRS said it is reducing voluntary correction program (VCP) compliance fees relating to failures to meet requirements with respect to participant loans. In addition, the agency clarifies that for certain overpayments, as defined in sections 5.01(3)(c) and 5.02(4) of Rev. Proc. 2013-12, a plan may use correction methods other than the correction methods set forth in sections 6.06(3) and 6.06(4) of Rev. Proc. 2013-12.

The IRS explains that Section 6.02(2) of Rev. Proc. 2013-12 provides that any correction of a failure should be reasonable and appropriate for the failure. Under correction rules described in sections 6.06(3) and 6.06(4), the employer is to take reasonable steps to have the overpayment returned to the plan. The agency says it has been informed that some plans have demanded recoupment of large amounts from plan participants and beneficiaries on account of plan administration errors made over lengthy periods of time, and that plan participants and beneficiaries, particularly those who are older individuals, may have financial difficulty meeting some corrective actions that have been sought by plan administrators, including the return of overpayments with substantial accumulated interest.

According to the IRS, some plans may be interpreting the correction rules as requiring a demand for recoupment from plan participants and beneficiaries in all cases. However, depending on the facts and circumstances, this may not be the case.

For example, depending on the nature of the overpayment failure (such as an overpayment failure resulting from a benefit calculation error), an appropriate correction method may include having the employer or another person contribute the amount of the overpayment (with appropriate interest) to the plan in lieu of seeking recoupment from plan participants and beneficiaries. Another example of an appropriate correction method includes a plan sponsor adopting a retroactive amendment to conform the plan document to the plan’s operations.

In Revenue Procedure 2015-27, the IRS also requests comments about recoupment of overpayments. Text of the document is here.