Compliance July 20, 2021

IRS Updates EPCRS With Additional Corrections

Among other changes, the agency has introduced two new correction methods for overpayments to DB plan participants or beneficiaries.

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The IRS has issued Revenue Procedure (Rev. Proc.) 2021-30, updating its comprehensive system of correction programs for sponsors of retirement plans.

The Employee Plans Compliance Resolution System (EPCRS) permits plan sponsors to correct plan and operational failures to continue to provide their employees with retirement benefits on a tax-favored basis. The components of EPCRS are the Self Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP).

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In summary, the new Revenue Procedure updates Rev. Proc. 2019-19 primarily to:

  • expand guidance on the recoupment of overpayments of defined benefit (DB) plan benefits;
  • eliminate the anonymous submission procedure under VCP, effective January 1, 2022;
  • add an anonymous, no-fee, VCP pre-submission conference procedure, effective January 1, 2022;
  • extend the end of the SCP correction period for significant failures by one year (which has the result of also extending the safe harbor correction method for employee elective deferral failures lasting more than three months but not beyond the extended SCP correction period for significant failures);
  • expand the ability of a plan sponsor to correct an operational failure under SCP by plan amendment; and
  • extend by three years the sunset of the safe harbor correction method available for certain employee elective deferral failures associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a 401(k) plan or 403(b) plan from December 31, 2020, to December 31, 2023.

Correction of Overpayments by DB Plans

The IRS says previous Revenue Procedures clarified the permissible methods for correcting overpayments under EPCRS by noting that, depending on the facts and circumstances, the correction may not need to include requesting that plan participants and beneficiaries return overpayments to the plan. The agency says that based on comments it received from stakeholders, it is further clarifying and expanding options available for the recoupment of overpayments.

Previous guidance is revised to provide that plan sponsors may offer overpayment recipients the option of repaying it in a single sum payment, through an installment agreement or through an adjustment in future payments.

There are also two new overpayment correction methods: the funding exception correction method and the contribution credit correction method. “These methods reduce the need for defined benefit plans to seek recoupment from overpayment recipients and ease the process for overpayment recipients repaying overpayments, while balancing the interest of other participants in the plan,” the IRS says.

Funding exception correction method. This method provides that corrective payments are not required for a plan subject to Internal Revenue Code (IRC) Section 436 funding-based limitations, provided that the plan’s certified or presumed adjusted funding target attainment percentage (AFTAP) that is applicable to the plan at the date of correction is equal to at least 100% (or, in the case of a multiemployer plan, the plan’s most recent annual funding certification indicates that the plan is not in critical, critical and declining, or endangered status, determined at the date of correction). Future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount.

For purposes of EPCRS, no further corrective payments from any party are required; no further reductions to future benefit payments to an overpayment recipient, or any spouse or beneficiary of the recipient, are permitted; and no further corrective payments from an overpayment recipient, or any spouse or beneficiary of a recipient, are permitted.

Contribution credit correction method. This method provides that the amount of overpayments required to be repaid to the plan is the amount of the overpayments reduced by:

  • the cumulative increase in the plan’s minimum funding requirements attributable to the overpayments (including the increase attributable to the overstatement of liabilities, whether funded through cash contributions or through the use of a funding standard carryover balance, prefunding balance or funding standard account credit balance), beginning with the plan year for which the overpayments are taken into account for funding purposes through the end of the plan year preceding the plan year for which the corrected benefit payment amount is taken into account for funding purposes; and
  • certain additional contributions in excess of minimum funding requirements paid to the plan after the first of the overpayments was made.

This reduction is referred to as a “contribution credit.” Future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount.

For purposes of EPCRS, if the amount of the overpayments is reduced to zero after the contribution credit is applied, no further corrective payments from any party are required; no further reductions to future benefit payments to an overpayment recipient, or any spouse or beneficiary of the recipient, are permitted; and no further corrective payments from an overpayment recipient, or any spouse or beneficiary of the recipient, are permitted.

However, if a net overpayment remains after the application of the contribution credit, the plan sponsor or another party must take further action to reimburse the plan for the remainder of the overpayment.

Explanations of Other Modifications

The new Revenue Procedure eliminate the condition that requires a plan amendment that increases a benefit, right or feature to apply to all participants eligible to participate under the plan.

It also increases from $100 to $250 the threshold for certain inconsequential amounts for which a plan sponsor is not required to implement correction.

The Revenue Procedure extends the end of the SCP correction period for significant failures from the last day of the second plan year following the plan year for which the failure occurred to the last day of the third plan year following the plan year for which the failure occurred.

Effective January 1, 2022, plan sponsors can request a no-fee, anonymous, VCP pre-submission conference under specified circumstances. Also beginning January 1, 2022, Audit CAP sanctions are required to be submitted through the Pay.gov website instead of by certified check or cashier’s check.

The IRS has extended by three years (from December 31, 2020, to December 31, 2023) the sunset of the safe harbor correction method available for certain employee elective deferral failures associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a 401(k) or 403(b) plan.

The Revenue Procedure also identified which plans are eligible for certain correction programs and the effects of examinations. If the plan or plan sponsor is under examination, VCP is not available. The regulation also identifies when SCP is available to a plan that is under examination.

Investing July 20, 2021

Plan Progress Webinar: Mid-Year Investment Review

At a recent PLANSPONSOR webinar, investment experts reviewed market performances throughout 2021 so far and key rules for plan sponsors to follow with investment lineups.

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A recent PLANSPONSOR webinar reviewed how investment committees are fulfilling their fiduciary responsibilities as they look toward a post-pandemic society, as well as best practices to follow for the second half of 2021. 

Investment experts began the discussion during the “Plan Progress Series: Mid-Year Investment Review” by reviewing equity market performances over the past year. Mat Powers, manager, retirement consulting investment services at Commonwealth Financial Network, said the news of effective COVID-19 vaccination efforts solidified much stronger performances in the first half of 2021 compared with the onset of the pandemic in early 2020. “As the vaccination efforts have proved successful, businesses have been able to rebound,” he said.

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And as vaccines expand in availability around the world, Powers said he anticipates fruitful gains on a global scale. “If the vaccine succeeds in the global market, I think there is a lot of room for strong performance in the latter year.” However, he warned plan sponsors of possible risks with the threat of new variants of the coronavirus. “Things can certainly turn on a dime,” he noted.

Low interest rates are also encouraging investors—including retirement plan investors—to mitigate risk and find ways to create returns. Peter Di Teresa, head of manager selection at Morningstar Research Services LLC, noted during that panel that yield curves have steepened significantly from the same time a year ago. Powers agreed, adding that interest rates are having a great impact on fixed income and other investments.

When asked what types of investments a defined contribution (DC) plan fund lineup needs to have to ensure diversification, Powers said target-date funds (TDFs) are at the top of the list, but he cautioned against offering too many funds. “TDFs are best because they receive the bulk of the assets in the 401(k),” he said.

Additionally, before offering TDFs, plan sponsors should understand the TDF glide path and show how it was considered and selected as a prudent option for participants, Powers added.

“Sponsors should look into the equity portion and how much is in domestic equity and how much is in long-term bond or short-term bond durations,” he explained. “Sponsors have to be able to demonstrate due diligence on the glide path itself.”

Reviewing the glide path is not only a way for sponsors to fulfill their fiduciary duties, but it can also be insightful to understand how the fund evolves over time, Di Teresa said. For example, as a participant reaches retirement, sponsors and advisers should search for other types of diversification that can fund the participant’s retirement, such as real asset exposure, inflation-protected exposure, etc., he continued.

“With the proliferation of target-date vehicles, we have seen more and more variety in terms of the overall risk profile,” Di Teresa said. “Ones that are more aggressive, ones that are moderate and others that are more conservative.”

Powers added, “Where the large majority of participants are using their retirement as long-term savings vehicle, it’s important to enact a long-term perspective. Looking at five- or 10-year metrics can establish a framework to the fund as a long-term savings option.”

These metrics can even include manager tenure and how turnover affects investment portfolios. For example, if an employer is currently offering a large-cap growth fund but will move to more of a blend approach under a new manager, plan sponsors must be prepared.

“Thinking about the long-term is key,” said Di Teresa. “The expectation is that once you invest in these funds, you’re going to be sticking to them for a long time.”

Meanwhile, looking toward other investment trends, as interest in environment, social and governance (ESG) funds grow, both Powers and Di Teresa advised employers that there are key steps they should take to avoid fiduciary risk if they’re interested in using an ESG fund. First, sponsors should evaluate ESG funds in the same manner they would with any other investment, Powers said. Second, outline what an ESG fund will look like in the investment policy statement (IPS).

“Make sure you are clear in the statement,” Di Teresa said. “You want to make sure that you are not committing yourself to something that you have not intended.”

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