The Internal Revenue Service (IRS) issued Notice 2023-43 on May 25, 2023 (Notice), to provide interim guidance on the expansion of the Employee Plans Compliance Resolution System (EPCRS), most recently described in Revenue Procedure 2021-30, under the SECURE 2.0 Act. The guidance, provided in a Q&A format, addresses a variety of lingering questions about a qualified plan’s new opportunities to self-correct "eligible inadvertent failures" under EPCRS at any time. The Notice specifies that this enhancement of EPCRS applies to failures that occurred either before or after December 29, 2022 (the date the SECURE 2.0 Act was signed into law), provided the requirements are otherwise
Section 305 of the SECURE 2.0 Act defines an "eligible inadvertent failure" as a failure that occurs despite the existence of practices and procedures that are reasonably designed to promote and facilitate overall compliance in form and operation with applicable Internal Revenue Code guidance. However, it also provides that an eligible inadvertent failure does not include a failure that is egregious, relates to the misuse of plan assets, or is directly or indirectly related to an abusive tax avoidance transaction.
Generally, the SECURE 2.0 Act provides that an eligible inadvertent failure can be corrected at any time if the following requirements are met:
- The failure has not been identified by the IRS prior to actions that demonstrate a plan’s "specific commitment" to implement self-correction. In the Notice, the IRS provides that a failure will be treated as having been identified by the IRS if the agency has initiated an audit of the plan. It also states that determining whether a "specific commitment" to self-correct has occurred means considering all relevant facts and circumstances but generally will be treated as compliant if the plan sponsor is actively pursuing correction of a specific identified failure. The completion of a compliance audit or adoption of a general statement of intent to correct failures when discovered are not sufficient to show a specific commitment to self-correct.
- The failure is corrected within a "reasonable period." The IRS specifies in this Notice that determining what is a "reasonable period" means considering all relevant facts and circumstances but will generally be treated as being compliant if a failure is corrected by the last day of the 18th month following the date the plan sponsor identifies the failure. An employer eligibility failure is treated as corrected within a reasonable period if the employer ceases all plan contributions as soon as practicable but not later than the last day of the 6th month following the date the failure is identified. Incidentally, the opportunity to self-correct insignificant failures, as determined under EPCRS, even if the plan is under audit, continues
to be available.
- The correction method is not specifically prohibited by EPCRS.
- The self-correction satisfies EPCRS’ required procedures, excluding those requirements that no longer apply because of the SECURE 2.0 Act, which include:
- Prohibitions on self-correction of certain failures related to certain loan failures, demographics, and employer eligibility;
- Having a favorable determination letter as to the plan;
- Provisions related to self-correction of significant failures that have been substantially completed before the plan or plan sponsor is under examination; and
- Correcting significant failures within the generally applicable time period of three plan years following the plan year in which the failure occurred.
The Notice clarifies which eligible inadvertent failures cannot be self-corrected, including:
- Failure to initially adopt a written plan document;
- A significant failure (as determined under EPCRS) in a terminated plan;
- Certain demographic failures;
- An operational failure that is corrected by plan amendment to conform the document to the plan’s operations, but which negatively impacts participants and beneficiaries; and
- An ESOP failure in which tax consequences other than plan disqualification are associated with the failure (e.g., a prohibited allocation of securities in an S corporation).
With respect to recordkeeping, the Notice provides that no new recordkeeping requirements are imposed because of the SECURE 2.0 Act. Current IRS recordkeeping requirements continue to apply, and require, if requested upon examination, a plan sponsor be able to offer documentation that substantiates the self-correction, including documentation that:
- Identifies the failure, year(s) of occurrence, number of employees affected, and the date of discovery of the failure;
- Explains how the failure occurred, the practices and procedures (formal or informal) that were reasonably designed for compliance and that existed at the time of the failure;
- Identifies and substantiates the method and date of correction; and
- Identifies any changes to the practices and procedures that were implemented to avoid the recurrence of the failure.
The Notice provides that any self-correction completed on or after December 29, 2022, and before May 25, 2023, the date this Notice was issued, will be considered compliant if the process demonstrates a good faith, reasonable interpretation of Section 305 of the SECURE 2.0 Act.
If you have any questions about the SECURE 2.0 Act in general, its enhancement of the self-correction program under EPCRS, and/or an identified plan failure that you think might be a candidate for self-correction, please contact any member of Calfee's Employee Benefits and Executive Compensation practice group.